Changes to Retirement Income Stream 2021

Do you have an income stream created with the money originally saved within superannuation?
Are you receiving regular income payments from your pension fund?
If yes, you need to be aware of the changes that our government has introduced to Pension Income Streams.

July 2021 has seen many changes within our superannuation system again.
My last, somewhat controversial article: “8 changes to super”, explained the changes affecting your superannuation in the accumulations stage.

What are the changes that affect your retirement income stream?

On 29 May 2021 there was an announcement of a temporary reduction of minimum income levels that have to be drawn from income streams.

If you have been retired for a while with your income stream in force for years, you will remember of those measures being introduced during GFC between 2008 and 2013, as well as during covid pandemic in 2019/20 and 2020/21 financial years that allowed for withdrawal of a reduced level of your minimum payments. 

If you are retired and you have sufficient level of income to live on, this is a great way to draw less from your pension fund and allow your money to recover from market drop after covid crash. In all honesty, the market has already recovered, on contrary, I hear opinions that maybe share market is becoming a bit overpriced, but regardless, the less you draw, the more your savings have a chance to grow and support you for longer. After all, our life expectancy is getting almost scary long, so you need to be very conscious about your financial situation, your super balance or your pension balance. Income in Retirement is essential.

What type of income streams are being affected?

This change will be applicable to Allocated Pensions or what we call Account-Based Pensions, market linked pensions that also go by the name of term allocated pensions and Transition to Retirement Income streams.

This change does not apply to defined benefit pensions such as lifetime or life expectancy regular income stream. 

How do pension payments work?

Once you decide to retire and you have reached the preservation age, you can now move or “rollover” your superannuation money from super fund – so the accumulation stage, to a pension fund – retirement stage. This is the time when your super provides you with regular payments at a level of your choice.

There is a limit as to how much can be moved from super to a pension – and that limit is called “the transfer cap”. Before July 2021, the limit of the transfer cap was $1.6mil, after 1st July 2021 it is between $1.6 and $1.7mil. So, if you are about to start your income stream after 1st July 2021, your transfer cap is the upper limit of $1.7mil. 

Once your retirement income stream has been set up and it is up and running, minimum payments are calculated based on the balance of your pension fund on 1st July of each financial year multiplied by a percentage factor that increases with your age. The older you are, the more money you are required to draw from your pension fund. The rule is, that you cannot draw less than a minimum. Why, I often get asked? Because a pension is designed to last for your life-expectancy, it is designed to support you and your lifestyle and not to smartly use the tax-free environment to leave money for your kids or other beneficiaries.  

You might be upset that this is outside of your control, after all those are your retirement savings, but don’t forget, superannuation and pension funds are highly government regulated. You get your tax benefits, but you have to comply to the rules. End of story. 

What are the minimum payments then?

Let’s see the example, how it works in real life:

Margaret is 67 years old, retired with an account-based pension valued at $300,000 on 1st July 2021. Being the age of 67, we can see from the table that her calculated minimum is 5% of the account balance, therefore her minimum payment should be $15,000p.a.

However, based on the change introduced by the government, this minimum can be halved to 2.5%, which means that the minimum can be dropped to $7,500p.a. But remember, this is your choice, you do not have to agree to this payment reduction, however, as I said before, if your cashflow allows for this reduction, most certainly this is only beneficial for you, as you keep the rest of your money in your pension fund to benefit from future market growth.

I go through this calculation with every client of mine, so they are fully informed of the choices and changes that are applicable to them in their retirement journey.

Payments must be received at least annually, but you can request your super fund to pay them as you prefer – find out from your super fund how often you can receive your payments.

Other questions that I often get are:

• Can I draw more than the calculated minimum? and
• Can I withdraw a lump sump from my pension fund?

You can draw from your pension an income of your choice, so it can be more than the minimum, but I would urge you to understand your budget and your cashflow and only draw what you really need. The more your leave in the fund, the longer it will support you with income payments.

And YES, you can draw lump-sums, but why would you? unless you really have to.

I always advice to keep spare cash in your everyday account and have a bigger amount in an “emergency account” for a rainy day, and keep the rest in your pension fund. Why? Because this is your tax haven, everything is tax-free.

• There is no income to be paid by you from the payments you receive from your pension fund
• there is no income tax paid by the fund internally (unlike superannuation in accumulation where 15% tax is paid less any deductions, such as franking credits for example)
• pension funds do not pay any CGT, unlike super funds (that pay 10% CGT for sold assets held longer than 12 months)

As you can see, there is a lot to gain by keeping your savings in a pension environment.

So what do you think about those pension changes? Do you believe you can benefit from them? Are you happy to sacrifice a bit of your current income to prolong life of your pension fund?

If you still find this financial area a bit nightmarish due to rules, limits, caps, conditions, I am not surprised, I have been doing this for over 20 years and every year there is something new to learn, update, change or re-do. If this is how you feel, but you want to make sure your retirement has been optimised to your full benefit, just drop me a line and we can chat privately.

Retirement is a journey not a destination, so be well prepared for the ride.

See you next time and take care.

And don’t forget to watch my next YouTube episode of AboutRetirementTV. 

By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement

Here is the article you might be interested in:

• Economic Update and Market Commentary
• 8 Superannuation Changes July 2021