Changes to pension drawdown and deeming rates

The Australian Federal Government has proposed two key measures to help retirees and those receiving income support to manage the financial impact of COVID-19.

1. Lower minimum pension drawdown rates

The government has announced a 50% reduction in the minimum income drawdown from account-based pensions and similar products for 2019-20 and 2020-21. 

This means Australian retirees can reduce income payments from their superannuation-based pensions or income streams to minimise the need to sell down assets in depressed markets. 

If you’ve already taken 50% or more of the required minimum payment for 2019-20 you or your financial adviser will be able to cancel any further payments until 30 June 2020 with your super fund. 

It’s not compulsory so if you’d prefer to maintain your income you don’t need to take any action. 

Case study: Maria’s account-based pension

On 1 July 2019, Maria was 67 and the balance of her account-based pension was $200,000. So her minimum pension payment for the 2019-20 financial year was calculated as $10,000 ($200,000 x 5%). 

Under the new temporary reduction in minimum pension payment, Maria will now only have to receive a minimum annual payment of $5,000 in 2019-20. However, if Maria has already received more than $5,000 from her account-based pension since 1 July 2019, she won’t be able to return any excess amount above $5,000 into her pension. 

On 1 July 2020, Maria will be 68. Let’s assume the balance of her account-based pension is $180,000. Maria can now choose to receive a minimum annual payment of $4,500 from her pension ($180,000 x 2.5%). 

2. Lower deeming rates

The government has also announced a further 0.25% reduction in deeming rates to reflect the low interest rate environment. 

This means Australians receiving the Age Pension and income support will have less income assessed from their financial investments. 

If you’re income tested the reduced deeming rate may result in an increase in your social security entitlements. 

New deeming rates

StatusThresholdsCurrent deeming ratesDeeming rates effective 1 May 2020
Single pensioner and alloweeFirst $51,8001.00%0.25%
Balance over $51,8003.00%2.25%
Partnered pensionerFirst $86,2001.00%0.25%
Balance over $86,2003.00%2.25%
Each member of an allowee coupleFirst $43,1001.00%0.25%
Balance over $43,1003.00%2.25%

The new drawdown and deeming rates will come into force from 1 May 2020, following the passage of legislation. 

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Zac Zacharia (Managing Director) has been assisting clients to create wealth and secure their futures for over 14 years.

He is also an accomplished presenter and educator

Co-authoring the popular investment book, Property vs Shares.