Once one of your clients starts a pension, there is a legislated minimum amount required to be paid out each year. There is no maximum amount other than the balance of their super account, unless it is a transition to retirement pension that is not in retirement phase, in which case the maximum amount is 10% of the account balance.
The purpose of minimum pension payments links back to the sole purpose test — super is intended for retirement, not as a tax-efficient way to transfer wealth to future generations (which is where products like testamentary trusts can be useful).
The minimum annual payment amount is worked out by multiplying the member’s pension account balance by a percentage factor. The percentages set out at present are as follows, and are based on the age of the fund member.
|Age||Minimum % withdrawal|
|95 or more||14%|
The government says these rates aim to ensure that funds are withdrawn from the tax‑free environment over time. Earnings on assets supporting superannuation pensions are tax free, as is the pension income for people aged 60 or over.
Take our poll: Should drawdown rates decrease, increase, or stay the same? (see below)
There was one recent period when the rates were reduced, during the global financial crisis. So for the years 2008-09 to 2010-11 the above rates were reduced by 50%, returning to 75% for 2011-12 and 2012-13, before reverting to full scale percentages for 2013-14 onwards.
The last review of retirement income streams by Treasury, which also looked at pension drawdown rates, was published in May 2016. The review was prompted by increased life expectancies, memories of the GFC, and considerations of a then low and falling interest rate (the official cash rate was 1.75% at the time, but 2% before that — falling to 1.5% by August).
The Treasury review considered whether, in light of these factors, the pension drawdown rates were still appropriate and whether concerns about ad hoc changes or retirees running out of money in retirement could be addressed through changes to drawdown requirements. Options considered included measures to create flexibility around the drawdown requirements, as well as across‑the‑board changes to the rates.
The conclusions made from this review were that the annual minimum drawdown rates were consistent with the objectives of the super system and should be maintained. Further it said changing drawdown rates would be contrary to the objective of ensuring that superannuation money is used for retirement income and transferred out of the concessionally taxed super system over time.
It did recommend however that the Australian Government Actuary should conduct further reviews every five years. “The Australian Government Actuary should be asked to undertake a review of the annual minimum drawdown rates every five years and advise the Government to ensure that they remain appropriate in light of any increases in life expectancy,” the review paper said. Treasury left open the possibility for changes in the event of, as the review put it, “significant economic shocks”.
The behavioural realities of drawing down
A study conducted by the Australian Centre for Financial Studies, made in conjunction with Monash University and also published in May 2016, was titled Superannuation drawdown behaviour: An analysis of longitudinal data. The paper, as its title suggests, looked at actual drawdown behavioural patterns of real retirees, using ATO data from 150,000 individuals (using anonymised records), covering both APRA-regulated funds and SMSFs, drawn over 11 years.
The study found that most retirees with account-based pensions withdrew close to the minimum allowable, although about 25% withdrew more than twice the minimum. Those with larger balances were more likely to be found in the former group.
From a behavioural science perspective, the paper suggested that many people may struggle with the complexity of the drawdown decision, and therefore use by default the minimum withdrawal rate as a guide.
Given that decisions must be made in the face of uncertainty around longevity and the cost of future expenses, the researchers thought it not surprising that the minimum rates came to act as an “anchor” for uncertain decision-makers. Drawing down on what can be viewed (once out of the accumulation stage) as a non-replenishing source may also represent a psychological challenge.
The research found that retirees with account-based pensions were essentially self-insuring for longevity risk, while also having the back-up assurance that an unspent balance can be passed on to beneficiaries.
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In your experience, thinking of your clients’ situations and expectations, should drawdown rates be increased, reduced, or stay as they are?