Fancy trying to live on half of your current pay?
Not many people would but for a whole class of Australians, that could be their new reality – at least for a while – when the new financial year ticks over.
And worse still, many of these Australians probably have no idea of what is about to happen to them.
The issue effects the millions of people who are living in retirement on their private pension – that is, their superannuation funds which are in pension mode.
It arose from one of the many decisions taken by the Morrison Federal Government in response to the COVID-19 pandemic but may well have been missed by many given the high volume of changes and announcements during this period.
Withdrawal rates on super halving
In simple terms, the change allows those with superannuation in pension mode to reduce the mandatory withdrawal rate by half.
It is meant to help reduce the exposure many superannuation pensioners have to selling off assets at lower prices due to volatile markets that could otherwise see their nest egg eroded.
The problem is that many fund managers may automatically set payments to the new minimum, which could see their pension payments halve.
Indeed, the response from superannuation funds has been many and varied.
Some funds will simply halve payments to any members who have set the minimum as their withdrawal level.
Other funds have announced they will keep pension payments at the old level unless customers ask for the reduction.
Still others have sent complicated letters to their members – some of which were likely never opened or ignored as complex and difficult to understand.
Some will find out about the change the hard way
Now that the financial year is ticking over, many of these superannuation pensioners will find out the hard way what the change really means when their pension payments are cut in half.
Even for those whose pension payments are surprisingly slashed, there are plenty of options.
They can contact their fund and arrange to have the pension payments reinstated at the former level – on the understanding that this will reduce the amount left in their fund to accumulate tax free.
Or they can rearrange their affairs if they have other savings or assets outside of inflation to take advantage of the opportunity to allow their nest egg to hopefully grow a little faster for longer.
It is in the hands of the retiree who can choose the rate that their money is paid out to them, as long as it is at or more than the government set minimum.
The chief executive of the Association of Superannuation Funds of Australia, Martin Fahy, said effected pensioners should contact their superannuation funds if they are concerned about the changes.
“Individual circumstances will determine whether the best option for retirees is to reduce or maintain their superannuation pension income, in the current environment,” said Dr Fahy.
“We therefore strongly urge retirees to contact their fund to discuss their specific requirements and determine the best option.”
Why would you want to accept a pay cut?
While the changes could be a big problem for retirees that are already struggling to make ends meet, they could fantastic for some others who don’t need the current minimum to live off but are forced to take it.
All superannuation funds are designed to be entirely paid out eventually, which is why the minimum amount paid out grows larger with age.
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.
However, because of the changes all of those rates have temporarily halved, meaning the new minimum is 2% ranging up to 7% of the fund balance.
That applies to all account-based pensions and annuities, allocated pensions and annuities and market-linked pensions and annuities for the 2019–20 and the 2020–21 financial years.
Lower pensions about to be sent to bank accounts
In practice, most funds reassess their pension payments at the end of the financial year so the new pension rates will begin to be sent out to bank accounts very shortly but can be changed if the fund member needs more money to live on.
The major reason for welcoming the new lower minimum drawdown amount is because it allows you to use less of their superannuation nest egg, which prevents the potential sale of assets at cyclical lows and preserves a larger amount of their savings in an environment where it attracts little or no tax.
Similar changes happened during the GFC when minimum withdrawal amounts were cut to avoid dramatic reductions in superannuation balances, although at that stage there were many fewer people living off their superannuation savings,
None of the changes will apply to aged pensions or other government welfare payments – they are only changes to minimum withdrawal percentages for superannuation in pension mode.