The Government has reduced the required SMSF minimum pension 2020 draw-down rates for all superannuation pensioners including SMSFs for the current financial year 2019-20 and the next financial year 2020-21.
Draw-down rates for account based pensions are normally 4% per annum for people under 65 an increase as pension recipients age. These rates have been halved for the 2020 financial year and the 2021 financial year to 2% for those people aged 64 or under and 2.5% for those between 65 and 74 years old.
Frequently Asked Questions:
We’ve also put togther a list of FAQ relating to these changes including strategies available to SMSF members: FAQs on Super Early Release for SMSFs $10k Coronavirus
Reduction of SMSF Minimum Pension 2020 Draw-down Rates
Retirees will be able to keep more of their superannuation nest egg rather than be forced to sell shares into a crashing market, under plans to reduce the amount they must compulsorily draw down each year.
During the global financial crisis, Labor halved the draw-down rates for each age group for three years, and reduced them by 25 per cent for two more years. The Morrison Government has done the same for SMSF minimum pensions 2020 and maybe also for the 2020/21 financial year.
Factsheet: Providing support for retirees
How are SMSF Minimum Pensions Calculated?
Once you start a pension or annuity on or after 1 July 2007, a minimum amount is required to be paid each year. There is no maximum amount other than the balance of your super account, unless it is a transition to retirement pension which is not in the retirement phase, in which case the maximum amount is 10% of the account balance.
The minimum payment amounts have been halved for certain pensions and annuities for the 2008–09, 2009–10 and 2010–11 years and reduced by 25% for the 2011–12 and 2012–13 years. The reductions in these years apply only to account-based pensions and annuities (allocated pensions and annuities and market-linked pensions and annuities).
SMSF minimum pension draw-downs apply to the following types of pensions
- Account based pensions
- Transition to retirement pensions
- Market-linked pensions
The draw-down amount is calculated from a member balances as of the 1st of July each financial year (or for practical purposes the 30 June balance from the preceding financial year).
To meet the minimum pension 2020 draw-down requirement, at least one payment must be made in the financial year, and it must be made in cash prior to 30 June 2021. Where a pension commences part way through a financial year, a pro-rata minimum pension draw-down applies and is calculated based on the number of days remaining in the financial year.
More information from the ATO here:
Should I reduce my SMSF minimum pension for the 2020 financial year?
If you receive an account-based pension from your SMSF and you wish to only withdraw the required minimum, you can hold off on drawing any further payments for the remainder of the financial year if you do not need the income. Similarly, if you’ve been taking a monthly payment based on the calculated minimum pension it may be worthwhile stopping the withdrawals for the remainder of the financial year.
The main advantage of not being forced to withdrawal the normal SMSF minimum pension for the 2020 financial year is that you will retain the cash within your SMSF which can be deployed as part of your investment strategy to take advantage of the inevitable uplift in equity values which occurs after severe, sharp market downturns like the one we’re currently experiencing as a result of the COVID-19 pandemic.
Can I return pension payments over the reduced minimums back to my SMSF?
Typically not. Anything already withdrawn from your SMSF as a pension payment over the reduced minimum cannot be returned to your SMSF as a reversal of a pension payment already taken. You may be eligible to re-contribute any amounts taken in excess of your requirements, however advice must be sought prior to doing so to determine your eligibility to contribute.
Example of the reduction in SMSF Minimum Pension Draw-downs 2020
Mike is a 66 year old retiree with a superannuation account-based pension
The value of Mike’s account-based pension at 1 July 2019 was $800,000. Under current minimum drawdown requirements, Mike is required by legislation to drawdown 5 per cent of his account balance over the course of the 2019-20 and 2020-21 income years.
This means Mike has to drawdown $40,000 by 30 June 2020 to comply with the minimum drawdown requirements. Following the temporary reduction in minimum drawdown requirements, Mike will now only be required to drawdown 2.5 per cent of his account balance, that is, $20,000, by 30 June 2020.
If Mike has already withdrawn over $20,000 for 2019-20, he is not able to put the amount above $20,000 back into his superannuation account.
On 1 July 2020 the value of Mike’s account-based pension is $700,000 (after drawdownsand investment losses). During 2020-21, Mike is required to drawdown 2.5 per cent of his account balance, which is $17,500, instead of $35,000.As a result of this change to minimum drawdown requirements, Mike is able to preserve his capital while still drawing an income from his superannuation.
Other useful articles on this topic
SMSF Association: The SMSF Association’s COVID-19 response
SMSF Adviser: Hold off on drawdowns until end of 2019–20
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Need assistance with your SMSF?
If you found this information useful, and need assistance with the administration of your SMSF, please contact us to learn more about our services and how we can help you simplify the complexities of your SMSF.