If you have converted your superannuation accumulation account to a pension account then you must start making withdrawals from the pension account.
This article details what the minimum pension payment rates are and how they differ depending on your age.
There are lots of benefits to superannuation, and one of the great things about superannuation pensions is the flexibility you have. When you have a pension you can set your pension payments as high as you like. You can even withdraw the full balance from it if you so wish. But you must make at least some payments, and these are known as the ‘minimum pension payments’.
The government dictates the minimum amount that these superannuation pension payments must be. The government does this as a way to ensure superannuation isn’t solely being used as an estate-planning vehicle – accumulating assets in a tax free environment just so your dependents get more money. The purpose of superannuation is after all to provide members with financial resources during retirement.
The minimum payment amount is based on a percentage of the account balance as at 1 July of each financial year. If the pension was commenced during the financial year, the minimum is adjusted according to how much remains of the year. For instance, if there is only half a year to go, then the required payments will be half as well.
Minimum Pension Payment Amounts
The annual minimum pension payment rates are:
|Age||Standard Minimum||Temporary reduction|
|95 and above||14%||7%|
In previous years the legislated percentage factor was temporarily reduced in order to help preserve account balances during sharemarket turmoil. The logic to this is so that pension recipients did not have to sell-down assets at significantly reduced prices in order to meet their pension obligations. This temporary optional reduction in minimum pension payment amounts has now happened twice. The first during the Global Financial Crisis (GFC) and the second during the Covid crisis (2020 and 2021 financial years).
On Saturday 29 May 2021 there was a shock announcement that there would be an extension of the temporary reduction in superannuation minimum drawdown rates for the 2021-22 financial year. As this was not mentioned in the 2021-22 Federal Budget which was released only weeks earlier, it caught everyone by surprise. As such the minimum annual payment amounts in the table above can be halved for another year.
The Proportioning rule
Superannuation has ‘tax-free’ and ‘taxable’ components. These are components are determined by whether the contributions were concessional or non-concessional contributions. Concessional contributions, and the funds earnings, contribute toward the ‘taxable’ components and on-concessional the tax free component. It would be ideal if you solely withdrew the ‘taxable’ component so that there was no possibility of tax at your death, however the proportioning rule prevents that.
The proportioning rule means that every pension payment or withdrawal must consist of both taxable and tax-free components. The split of each component will be dictated by the split between the components of the total pension balance. For example, if your pension balance is 50% of each component, then the pension payment will consist of 50% of each component.
There are strategies to get around this. For example, when planning for retirement people often make significant contributions of after tax money into superannuation. By contributing non-concessional contributions into a second superannuation account, you can segregate tax-free component from the taxable component and withdraw more heavily from the pension account with containing the taxable portion. A good financial planner who specialises in retirement planning will know this and factor it in when providing advice.