Drawdown rates: Too high, too low, about right?

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
Under 65 4%
65–74 5%
75–79 6%
80–84 7%
85–89 9%
90–94 11%
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The government says these rates aim to ensure that funds are withdrawn from the tax‑free environment over time.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.

Take our poll
In your experience, thinking of your clients’ situations and expectations, should drawdown rates be increased, reduced, or stay as they are?

Pension drawdown rates. Are they:

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Website Comments

  1. Peter Oh

    I think the draw down rate should be reduced as Pensioners are allowed to draw down more than the minimum amount should the need arise. The reason being that older Pensioners do not spend as much as younger ones apart from their healthcare.

  2. Allen Monaghan

    I consider that the draw down amounts should be left entirely at the discretion of the retiree.
    Each fund member knows what funds they need to meet every day expenses and other life costs.
    By increasing the minimum draw down % it reduces the capital base of the fund and thus reduces the amounts available for future years.This consequently reduces the amount of future drawdowns due the capital base reduction.At a time when ,in particular, medical, costs increase due to ageing.
    All of this at a time when int rates on savings are reducing.

  3. Rodger G Gibson

    The last review was done in 2016 which was before the pension account cap of $1.6m and concessional contributions limited to $25k pa commenced 1/7/2017.
    These limits now mean most future retirees will never achieve the concessional pension cap in a lifetime of contributions and provide sufficiently until they die
    With prudent pension fund earnings now minimal for the foreseeable future there is a real risk by continuing with min drawdowns of >6% -14% after age 75 that many will simply run out of pension funds soon after 75 so become dependant on the public purse as they age .
    I believe the min drawdown should be 6% from age75 onwards to allow age pensioners to spread the funds out over a longer period of life expectancy

  4. Maurice Linker

    The minimum withdrawal amount must be removed to ensure that the retiree will not exhaust his pension funds and become government funded pension well before death
    If the aim is a wealth transfer of funds than the retiree can do this by transferring funds to an accumulation fund taxed at 15% tax
    So leave it to the retiree to decide – they are very financially educated

  5. barry a mcbride

    The annual minimum should be as required by retirees,not by government policy, as every ones needs are different.
    the disadvantage is that capital funds are eroded at a time of minimum earning potential and are sure to fall even lower.
    retirees should not slugged with penalty caused by others events outside the superannuation industry.
    pension increments should be negotiable by retirees as funds are needed.

  6. Bill Gupta

    As value of assets increase income may not increase. So assets are required to decrease if minimum amount is fixed. Ciling should be on maximum amount to run longer. Minimum amount restriction should be abolished.

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