The first day of July each year usually brings about changes of some description for Australians and their finances. Rarely a financial year goes by with the federal government of the day altering a rule here and a rate there.
Prior to 1 July, the federal government halved the minimum amount retirees must withdraw from super each year. As of 1 July, that minimum drawdown rate has doubled.
That means retired Australians must now draw down twice as much from their super or face significant tax penalties. It’s a hefty jump, even though it is a reversion to the mandated minimum pre-pandemic drawdown amounts.
The concessional period helped many retirees during the pandemic. But now, despite continuing market uncertainty, these concessions have ceased.
What does that mean for you?
If you are retired and your super is now in the income phase, you’ll need to check how much you’re drawing down each year. If you’re one of the many who took advantage of the reduced drawdown rate to leave more super in your account, it’s recommended you seek advice from a financial professional, to ensure you’re getting the appropriate tax concessions.
Retirees under the age of 65 must now withdraw at least four per cent of their account balance each year – double the rate of the previous four financial years. The drawdown rate increases with age. For each age group the figure has doubled, reverting back to its pre-pandemic rate.
|Age at 1 July
|New (standard) minimum drawdown rates from 1 July 2023
|Previous (temporary 50%) drawdown rates until 30 June 2023
|95 or over
If you’re a retiree who hasn’t changed your withdrawal rates during the past four years, you won’t be affected. That’s assuming you were meeting the minimum drawdown rate before the pandemic.
Those who have taken advantage of the reduced drawdown rates risk missing out on tax breaks if they don’t revert.
What happens if I don’t meet the minimum drawdown rate?
Failure to comply with the minimum drawdown rate could result in your super pension losing its tax-free status.
The Australian Taxation Office (ATO) deems that the income stream has stopped, and all payments made during that financial year are treated as super lump sums for income tax purposes. This means you could be paying 15 per cent tax rather no tax at all.
However, if your super is with a large fund, your minimum payments may be adjusted automatically each year. It’s best to check with your fund.
Some large super funds, such as AustralianSuper, will provide clients with an appropriate explanation on their websites.
Are there mitigation strategies available?
The pandemic is receding from mainstream consciousness, leaving more than half of Australians aged 65 and over (59%) more worried about debt than health, according to one survey.
A National Seniors report suggests fixed-income investments as one strategy to ease money worries among older people.
“Clients … can invest as little as $10,000 into fixed income securities,” according to the report’s sponsor, Australian Bond Exchange.
This will allow them ‘to generate an additional stream of predictable income throughout retirement’.
There may be other strategies available for retirees worried returning to a higher drawdown rate. As always, the best advice is to seek the help of a registered financial planner.
Were you aware the drawdown rate was reverting to its pre-pandemic level? Will this have an impact on you?
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