In late March, the Australian government announced that the mandatory minimum drawdown rate from account-based pensions would remain reduced for a third consecutive financial year, and there is a growing call to make the lower rates permanent.
The Eureka Report’s Scott Francis and Jon Kalkman, a former director of the Australian Investors Association, are two financial analysts who believe the lower rates should be permanent.
Under rules introduced in 2007, anyone with a super pension fund has to draw down a minimum amount every financial year. The amount is calculated as a percentage of the total amount, with the percentages mandated on a sliding scale based on age brackets, ranging from 4 per cent for those aged under 65 to 14 per cent if you are 95 or older.
The rationale for introducing these minimum rates was to encourage older Australians to spend in retirement rather than pass their savings on to to beneficiaries.
As a concession during periods of financial volatility, the government has lowered the minimum rate. It did so during the Global Financial Crisis of 2008 and again in March 2020, not long after the onset of the COVID epidemic.
Rates for all age brackets were reduced by half, with those under 65 required to withdraw no more than two per cent and those older than 95 seven per cent.
The Morrison government extended that ‘discount’ early last year, and did so again this year, with the lower rates to remain until the end of the 2022/23 financial year. But there is little indication the reduced drawdowns will be extended beyond that date.
Writing for the Eureka Report last month, Scott Francis provided five justifications for making the lower rates permanent:
- helping preserve retirement capital
- allowing retirees the flexibility to change withdrawal rates during a downturn
- strict contributions limits already restrict the ability of people to use superannuation as an estate planning vehicle, the major argument against permanent lower minimum withdrawals
- higher withdrawal rates force retirees to erode their superannuation capital
- retirement expenses are ‘lumpy’ and a lower minimum allows retirees more flexibility to match pension withdrawals to cash flow needs.
Mr Francis argues that making the changes permanent would be a simple low-cost process.
Former director of the Australian Investors Association John Kalkman has also lauded the extension and believes the change should be permanent. Writing for finance publisher Firstlinks, Mr Kalkman said doing so would encourage self-funded retirees to remain just that – self-funded.
“The current halving of mandatory drawdowns for superannuation pensions does not limit how much retirees can withdraw from their super, but it provides them with much greater flexibility in these uncertain times of low investment returns, rising inflation and increased longevity,” he said.
“If the government is serious about encouraging self-funded retirees to remain self-funded for as long as possible, thereby ensuring that super reduces the long-term cost of the Age Pension, it should make the halving of these mandatory pensions permanent.”
Mr Kalkman argues that even in non-volatile periods, the lower rate provides benefits to both the individual and the government. For instance, money held in 2007 that was returning eight per cent is more likely to be paying around one per cent today.
“This dramatic reduction in income [through lower returns],” says Mr Kalkman, “has meant the liquidation of assets much sooner than anticipated, or a search for yield higher up the risk curve which brings its own volatility. Lower returns hasten the day when the super pension fund is exhausted and retirees claim the Age Pension.”
Whether the government agrees with that assessment beyond 2023 remains to be seen, but for now, account-based pension holders can take advantage of the reduced rates, which are outlined below.
As always, before making any decisions based on these rules, consultation with a licensed financial adviser is recommended.
|Government minimum drawdown rates|
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