Retirees scramble after given another chance to live on ‘half pay’

If you haven’t seen your financial planner recently, there is a very good reason.

In a somewhat surprising development, the Australian Federal Government has announced that superannuation minimum withdrawal requirements can once again be halved starting from July.

That has laid waste to the work that many planners had done anticipating a return to normal minimum withdrawal limits and has caused a lot of scrambling by super funds which now must try to get some idea from their retired members about what super pension income they want.

Ostensibly, the change is meant to help retirees living on their super to recover from the COVID-19 effects on financial markets.

However, that seems curious given that most super funds have enjoyed a bumper year and there is little prospect of private pensioners having to sell off assets at low prices and needlessly eroding their nest egg.

Time to check on opportunities and pitfalls

Either way, if you are retired and live on a super pension it is worth being alert to the opportunities and the pitfalls of this unexpected extension of the minimum payments.

If you don’t want to accept the new, lower minimum for the coming financial year, you should contact your super fund and tell them what level you would prefer.

You have flexibility to set the amount of withdrawals, as long as the minimum amount is exceeded.

All superannuation funds are designed to be entirely paid out eventually, which is why the minimum amount paid out grows larger with age.

In “normal” years it begins at 4% of fund balances on retirement and ranges all of the way up to 14% a year for those aged 95 and above.

For the second year in a row though, these rates have temporarily halved, meaning the new minimum is 2% ranging up to 7% of the fund balance.

Why would anyone be happy with half pay?

So why would you prefer to accept another year on “half pay”?

Well, the main reason would be because it allows your retirement nest egg to keep accumulating tax free, providing more money for the rest of your retirement.

Reducing payouts is probably more appropriate for wealthier retirees who have other savings or assets outside of super that they can use to bolster their income.

The flurry of activity around reduced mandatory withdrawal limits comes as the Federal Government pushes forward with its controversial plan to overhaul the $3.2 trillion superannuation sector so that the new regime can start in July.

Government gets super reforms through Senate

The Your Future, Your Super package was announced in last year’s federal budget and has prompted a war of words between industry funds, Labor and the Coalition.

Particularly contentious have been the so-called “stapling” of workers to their super accounts and subjecting funds to investment benchmark tests to weed out poor performers.

While the stapling of funds to workers is designed to stop the problem of multiple funds, criticisms have centred on workers in high-risk industries potentially being underinsured if they are carrying insurance from an earlier, lower-risk job.

The legislation aims to save workers $17.9 billion over 10 years and improve investment returns by pressuring “dud funds” with new performance benchmark tests.

Fund performance will be checked from

1 July

These tests will now kick in on 1 July with stapling to take place in November, after a successful passage through the Senate after negotiations between Superannuation Minister Jane Hume and Treasurer Josh Frydenberg with One Nation’s Pauline Hanson and Centre Alliance’s Stirling Griff.

Never one to back off from some controversy, Senator Hanson’s support came despite claims that she could personally benefit from higher concessional contributions for those aged 67 and above, for the current financial year onwards.

Senator Hanson is 67 – although even she seemed confused about when her birthday was.

“These are really significant reforms,’’ said Mr Frydenberg.

“They’ve been opposed tooth and nail by a Labor party that doesn’t want to reduce people’s superannuation fees,” he said, also promising there would be more super reforms to come.

The package passed through the lower house in early June but only after the removal of extra powers opposed by Nationals MP Barnaby Joyce and several crossbench MPs, which would have allowed the Treasurer to directly intervene on super funds’ investment decisions.