The Federal Government announced today that it will provide temporary relief from the minimum pension draw-down requirements for account-based, allocated and market-linked pensions and annuities by reducing the minimum drawdown for the 2009 income year by 50%.
The relief is designed to address the fact that asset values have declined substantially since the minimum pension drawdown was calculated for pensions commenced as at 1 July 2008 (or the commencement date of the pension, if the pension was commenced in the current income year). The significant drop in member balances since 1 July 2008 has raised concerns that assets will have to be sold to meet minimum pension requests, forcing fund trustees to crystallise losses.
Members who have already withdrawn at least half the minimum amount for the income year will not be required to make any further withdrawals until the 2010 income year. Members who have not yet taken their minimum payment will only need to draw down half the prescribed amount (ie for a person on a transition-to-retirement pension, 2% rather than 4% of the pension account balance). The relief will not apply to members who have already withdrawn the minimum amount.
For example, a client (aged 60) with a minimum drawdown of $40,000 in the 2009 income year will only be required to drawdown $20,000. If the member has already drawn down $15,000, they will only be required to take another $5,000 for the 2009 financial year.
Fund members seeking to utilise declining asset values by commuting their existing pensions and commencing a new pension with a reduced minimum drawdown this relief may save them the trouble. However, it may still be beneficial to commute and commence a new pension as the pro-rata minimum drawdown for the new pension will be further reduced by the 50%.
For example, if the client above took a pro-rata pension payment of $13,333 on 28 February 2009 based on the reduced minimum drawdown for the 2009 income year, then commuted their existing pension and commenced a new pension with a minimum drawdown of $20,000 (reduced to $10,000 with the temporary relief) based on a 50% reduction in the fund's asset values, the member would be required to draw down the pro-rata amount of $3,333 for the 2009 income year.
| Account balance |
$1,000,000 |
$1,000,000 |
$500,000 |
| Minimum payment based on 4% |
$40,000 |
$26,666 ($40k * 8/12) |
$6,666 ($20k * 4/12) |
| New minimum payment after 50% reduction |
$20,000 |
$13,333 |
$3,333 |
* NB: calculations are based on months and have been rounded, whereas pro-rata pension payments would need to be calculated on the days remaining in the financial year.
Therefore, by commuting the existing pension and commencing a new pension, the client is able to leave an additional $3,333 in superannuation by reducing the minimum drawdown to $16,667 instead of $20,000.
What can you do
- pensioners are only required to drawdown 50% of their pension minimum for the current income year;
- contact your fund administrator to cease any further pension payments if you have drawn down the minimum and do not need the money to meet their living expenses; and
- consider commuting existing pensions and commencing a new pension based on the reduced asset values of the fund.