Pension relief better for 2020/21

pension drawdown reduction

The reduction in minimum pension drawdown amounts will have a greater impact in the next financial year, but trustees should be planning for it now.

The reduction in the minimum pension drawdown amounts announced by the federal government will be more beneficial in the next financial year, but plans to maximise those benefits should be made in the current year, according to the head of an SMSF administrator.

Heffron chief executive Meg Heffron said while the changes will relieve concerns for pensioners worried about having to sell assets to make pension payments in the 2020 financial year, the reduction will be amplified in the 2021 financial year.

“Next financial year, the compulsory minimum pension payments will be based on the value in the pension account at 1 July 2020. That means that any falls in value will automatically be reflected in the amount that has to be paid next [financial] year,” Heffron said in a blog post on the firm’s website.

“That means those who are looking to take as little as they possibly can from their pensions will benefit from both having their pension calculated on a smaller base and also having a lower compulsory drawdown rate than normal.”

She said pensioners could put a stop to a pension from an SMSF and the process to do so was straightforward, but those pensioners who expected to have insufficient cash to make pension payments in 2020/21 should consider this issue in the lead-up to 30 June 2020.

The ability of an SMSF to be able to make the required pension payments was linked to the cash flow of the fund rather than its size, she noted, adding incoming cash from share dividends was not linked to a company’s share price.

“The fact that a company’s share price goes down doesn’t automatically mean any change to its dividends. During the global financial crisis in 2008/09, a lot of companies were still able to pay dividends and these provided the cash flow to meet pension payments even when markets were in freefall,” she said.

“The real challenge of 2020 is that unfortunately the causes of the market falls are also likely to have a negative impact on business profitability and therefore dividends.”

The only silver lining in relation to the coronavirus pandemic and weaker investment markets was that it was a better time to start a pension to take full advantage of 2017 regulations that capped the amount that could be placed into a retirement-phase pension, she said.

These rules put an upper limit (initially $1.6 million) on the amount that could be used to start a pension. They don’t limit the amount a pension account can grow to once it starts. Hence in many ways the best time to start a pension is when markets are at their worst,” she said.

“Consider someone whose superannuation was worth $1.8 million at 1 July 2019. Today it’s worth $1.5 million. If they start a pension today with their entire balance, the starting value is comfortably within the $1.6 million limit.

“If markets recover back to $1.8 million over time, they won’t have to take extra amounts out of their pension to get back down below $1.6 million. All the government cares about is how much it was worth at the start.

“So, the silver lining only benefits a few people – those who were about to start pensions but haven’t done so yet.”

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