Pension threshold move may impact cash flow

minimum pension thresholds

The return to full rates for minimum pensions may be accompanied by a change in thresholds for some pensioners, creating a need for greater cash flow in the coming financial year.

Superannuation members drawing a pension may be aware they are unlikely to retain the reduced level of minimum pension payments of recent years, but an SMSF expert has warned them to check if they have also changed thresholds, which may impact the cash flow from their fund.

SuperConcepts SMSF technical and strategic solutions executive manager Phil La Greca said the recent budget contained no new announcements regarding the ongoing status of reduced minimum pension payments and it was likely to return to the full rates used in the 2019 financial year.

“In the last four years, so for 2019/20, 2020/21, 2021/22 and 2022/23, the minimum pension drawdown factor has been reduced by 50 per cent,” La Greca said in a recent online presentation, referring to a reduction first introduced as part of COVID-19 economic relief measures.

“It is in the law that the reduction ceases at 1 June 2023 so unless we get something in the next four weeks amending this piece of legislation, on 1 July 2023 the undiscounted factor will apply.”

According to the ATO, these undiscounted rates are 4 per cent for people under 65, 5 per cent for those 65 to 74, 6 per cent for those 75 to 79, 7 per cent for those 80 to 84, 9 per cent for those 85 to 89, 11 per cent for those 90 to 94 and 14 per cent for those over 95, and were last applied from the 2014 to 2019 financial years.

La Greca highlighted the return to full rates may coincide with people moving to a higher minimum pension rate given the reduced rates had been applied for an extended period.

“The return to an undiscounted rate could be something of interest to your clients because if they are in pension phase [and aged 65 to 74], they have been paying 2.5 per cent and have only needed 2.5 per cent cash flow,” he said.

“Come July, it will be 5 per cent and for some people it will be even worse because they could cross bands because as people get older the minimum factor goes up, and after 75 from five to six, then seven, nine, 11 and finally to 14 if you’re over 95.

“It is possible that someone could have a massive increase in terms of their minimum pension amount because not only is the 50 per cent discount removed, but they’ve crossed into a new threshold band and that is something to watch out for.”

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