Halving of minimum pension draw down rates continues | Heffron

With no news in this month’s Federal Budget, we had assumed the temporary halving of the minimum pension draw down rates would cease on 30 June 2021 (as currently legislated). However, the Government has now announced an extension for one more year.

As part of their response to the coronavirus pandemic, in March 2020, the Government temporarily reduced the minimum pension draw down rates for 2019/20 and 2020/21. This 50% reduction was due to expire on 30 June 2021 but the Government has now announced an extension to 30 June 2022. 

The revised rates for account-based pensions in 2019/20, 2020/21 and now 2021/22 are as follows:

What type of pensions qualify for the reduced drawdown rates?

As per the current rules, we expect the 12 month extension will apply to:

• account-based pensions (including transition to retirement income streams),
• allocated pensions (including transition to retirement pensions), and
• market linked pensions (also commonly called term allocated pensions). 

(note that different draw down rates apply to allocated and market linked pensions).

As with the current rules, we do not expect the extension will apply to lifetime or life expectancy pensions. 

Minimum pension tips

Whilst this recent announcement is simply an extension of the current temporary rules, to ensure the optimal outcome for clients, it is important to understand how these rules work:

• The legislation halves the drawdown rates themselves (eg the normal 5% draw down factor for the recipient of an account-based pension aged 65-74 is now 2.5% etc). Simply halving the "normal" payment amount itself, rather than rate, will often give a different result. Whilst the difference may be small, it can result in a pensioner inadvertently failing the minimum pension rules.
• There is no halving of the maximum applicable to transition to retirement income streams or marked linked pensions.
• The current $100,000 per annum threshold for market linked pensions is also not halved. Note, this threshold (technically known as the “defined benefit income cap”) will be indexed to $106,250 on 1 July 2021.

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