Reprieve on SMSF pensions
February 18, 2009
PORTFOLIO POINT: Halving the minimum pension requirement for SMSF pensions will help people avoid having to sell growth assets.
Investors and investment professionals have been waiting for Superannuation Minister Nick Sherry to make a difference: Today he finally made a big decision, and it's a good one: the minimum drawdown rates for superannuation pension streams have been halved for 2008-09.
To be precise, the minimum withdrawal from a superannuation pension income stream will be reduced by 50% for this current financial year as a result of the turmoil seen in investment markets. The change will help people avoid having to sell super fund assets, such as shares, to pay their minimum pension in an environment where the value of assets may have fallen by 50% or more. This failing of allocated pensions has been highlighted in previous editions of Eureka Report.
How your pension may be affected
As a practical example of how the problem had been emerging, consider an account-based pension with assets of $800,000 (as at July 1, 2008) owned by a 60 year-old. The minimum pension for a 60 year old had been equal to 4% of the account balance for the year; that is, they would have been required to draw a minimum $32,000 annual pension. The change cuts that to $16,000.
The announcement specifically states that the superannuation pension options covered include:
- Account-based annuities and pensions (payable since July 1, 2007).
- Allocated annuities and allocated pensions (pre-dating the Better Super changes).
- Account-based and allocated pensions payable from Retirement Savings Accounts.
- Market-linked (term-allocated) annuities and pensions.
Sherry's statement, issued in conjunction with Treasurer Wayne Swan, says the key reason for the change is to prevent retirees having to sell down growth assets at a time of depressed investment values.
Looking at the current level of dividend payout on the ASX it seems that a diversified portfolio of Australian shares is still likely to provide an income yield of comfortably more than 5%; plus the benefit of franking credits - another 2%. This level of income should mean the average superannuation investor can draw a pension within the new (50% lower) 2008-09 minimum pension guidelines from the dividend payments received without having to sell assets at their current low levels.
Your wider investment strategies
One legitimate strategy some superannuation investors have undertaken to reduce their minimum pension withdrawal, and to get around the problem of selling growth assets at their current low levels, has been to "roll" some of their super assets back into "accumulation" phase. For example, they may have had $800,000 in an account-based pension with the minimum withdrawal of 4% ($32,000). However, they may have decided to convert $200,000 of their superannuation assets back into the accumulation phase, leaving $600,000 in the pension phase, reducing the minimum withdrawal figure to $24,000.
The downside of this strategy is that assets in the accumulation phase are now taxed at 15% for income and 10% for long-term capital gains, whereas a pension fund pays no tax. Therefore, it makes sense from a tax perspective for a person in this situation to look to combine their assets back into one superannuation pension fund and make use of the lower withdrawal rates to reduce their minimum pension.
For people using a transition to retirement "TRIP" pension strategy, where a superannuation pension stream is combined with an aggressive salary sacrifice strategy to build superannuation assets closer to retirement, the option is available to reduce the amount of minimum pension being withdrawn if you cash flow allows, leaving more in your account for eventual retirement. (For example, if you are receiving the $900 economic stimulus payment, you might want to decrease your transition to retirement pension payments by this amount, leaving a higher balance in your pension fund).
Implementing a reduced pension
For those people who receive a pension regularly - say, monthly or fortnightly - they will now be able to simply stop or reduce these payment amounts as their circumstances dictate. Given that we are more than halfway through the financial year, the 50% minimum withdrawal requirement is likely to have been already met, so people can elect to take as little as they need for the remaining four-and-a-half months of the financial year. This should be discussed with your superannuation pension fund administrator, or self-managed super fund administrator/accountant.
For those people who take an annual pension amount at the end of a tax year, they will be able to elect to take an amount 50% smaller than they previously would have had to . if they choose to.
The people most disadvantaged by the announcement would seem to be those who have already withdrawn their full minimum pension amount for the year and are no longer able to contribute to superannuation. There does not seem to be any concession at this stage for those who have taken the previously higher minimum amount to now elect to take a reduced minimum and recontribute the difference to their superannuation fund. This may be addressed in the future detail of this announcement. For those people still eligible to contribute to superannuation, they could simply recontribute any surplus amount that they do not need to use to superannuation and then roll that into their pension fund.
The change to the minimum withdrawal laws in allocated pensions is very good news and a practical response from the government to the exceptionally difficult markets facing investors. Forcing investors to sell shares into a falling market has been the opposite of dollar cost averaging and the opposite of good sense.
There is no decision at this stage of to extend the plan beyond June 30 this year. Sherry is set to review the plan in a few months time, so it may be extended but it is impossible to say.
In addition, it's worth noting the changes to the age pension assets test, which came into effect towards the end of 2007 and allowed (for example) a home-owning couple to have $870,000 worth of assets excluding the value of their home, also provides the potential cash flow safety net for retirees.