Do you have an income stream created with money originally saved within superannuation?
Are you receiving regular payments from your pension fund?
If yes this video is perfect for you, as today we are discussing changes
that our government has introduced to pension income streams.
July 2021 has seen many changes within our superannuation system again.
Last week I introduced changes affecting your superannuation in the accumulation stage,
with my somewhat controversial video: "8 changes to super" so watch it and
let me know if you agree or disagree with me.
I received many emails from viewers so obviously this is a hot topic.
My name is Katherine Isbrandt. I'm Certified Financial Planner and
this is "AboutRetirement TV" - the place to get all the information how to be well financially prepared
for your upcoming retirement as well as how to optimize your retirement income and assets if you are already there.
"RETIREMENT IS A JOURNEY NOT A DESTINATION SO BE WELL PREPARED FOR THE RIDE"
What are the changes that affect your retirement income stream?
On 29th May 2021 there was an announcement of a temporary reduction
of minimum income levels that have to be drawn from income streams.
If you have been retired for a while with your income stream in force for years,
you will remember of those measures being introduced during GFC between 2008 and 2013,
as well as during COVID pandemic in 2019-20 and 20/21 financial years,
that allowed for withdrawal of reduced level of minimum payments.
If you are retired and you have sufficient level of income to live on,
this is a great way to draw less from your pension fund and allow your money to recover from market drop after COVID crash.
In all honesty however, the market has recovered already, on contrary I hear opinions that maybe
share market is a little bit overpriced right now, but regardless the less you draw
the more money, more savings stay in your fund to grow for longer.
After all our life expectancy is getting almost scary long, so you need to be very conscious about your financial situation,
your super balance or your pension balance. Income in retirement is essential.
What type of income streams are affected?
This change will be applicable to allocated pensions or otherwise called account based pensions,
also market link pensions that also go by the name of term allocated pensions,
and transition to retirement income streams.
This change does not apply to defined benefit pensions such as lifetime or life expectancy regular income streams.
How do pension payments work?
Once you decide to retire and you have reached the preservation age,
you can now move or rollover your superannuation money from superfund so the accumulation stage
to a pension fund - your retirement stage.
This is the time when your super provides you with regular payments at the level of your choice.
There is a limit as to how much can be moved from super to a pension and that limit is called the transfer cap.
Before July 2021 the limit of the transfer cap was $1.6 mil after 1st July 2021 it is between $1.6 and 1.7 mil.
So if you are about to start your income stream after 1st July 2021, your transfer cap is the upper limit of $1.7 mil.
Once your retirement income stream has been set up and it's up and running,
minimum payments are calculated based on the balance of your pension fund on 1st July of each financial year.
multiplied by a percentage factor that increases with your age.
The older you are, the more money you are required to draw from your pension fund.
The rule is that you cannot draw less than the minimum. Why? I often get asked -
Because pension is designed to last for your life expectancy. It is designed to support you and your lifestyle,
not a smart way to use tax-free environment to leave money behind for your kids or other beneficiaries.
You might be upset that this is outside of your control, after all those are your retirement savings.
But don't forget superannuation and pension funds are highly government regulated,
you get your tax benefits but you have to comply with the rules. End of story!
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If yes SUBSCRIBE to my channel not to miss my next video.
So what are those minimum payments then?
Well, if you are under the age of 65 the usual minimum is 4%
of the balance of your pension fund on 1st July of the new financial year.
However in 2021/22 financial year, this minimum payment can be halved right down to 2%.
If you are aged between 65 and 74 the minimum usual is 5% which again can be halved this financial year right down to 2.5%
If you are 75 to 79 the usual minimum is 6%, again it can be halved right down to 3%, and so on.
So find your age and have a look what minimum applies to you this financial year.
Those are the figures directly from SIS Act, which is Superannuation Industry Supervision Act.
Let's see the example how it works in real life.
Margaret is 67 years old retired with account based pension valued at $300,000 on 1st July 2021.
Being age of 67 as you can see from my table, her calculated minimum is 5% of the account balance,
therefore her minimum payment should be $15,000 p.a, however based on the change introduced by the government
this minimum can be halved to 2.5%, which means that the minimum can drop right down to $7,500.
But remember this is your choice you don't have to agree to this payment reduction,
however as I said before if your cashflow allows for this reduction, most certainly this is only beneficial for you,
as you keep the rest of your money in a pension fund to benefit from future market growth.
I go through this calculation with every client of mine so they are fully informed
of the choices and changes that are applicable to them during their retirement journey.
Payments must be received at least annually but you can request your super fund to pay them as you prefer.
Find out from your super fund how often you can receive your payments.
Other questions that I often get are:
"Can I draw more than the calculated minimum?" and "Can I withdraw a lump sum from my pension fund?"
You can draw from your pension and income of your choice, so it can be more than minimum but
I would urge you to understand your budget and your cash flow and only draw what you really need.
The more you leave in the fund, the longer it will support you with income payments.
And yes, you can draw lump sums. But why would you unless you really, really have to.
I always advise to keep spare cash in everyday account,
and have a little bit bigger amount in your emergency account for a rainy day,
and keep the rest in your pension fund. Why?
Because this is tax heaven - everything is tax-free!
There is no income tax to be paid by you for payments you receive from your pension fund.
There is no income tax paid by the fund internally unlike superannuation in accumulation stage,
where 15% tax is paid less any deduction such as for example franking credits.
And pension funds do not pay any Capital Gains Tax unlike super funds that pay 10% Capital Gains Tax
for sold assets held for longer than 12 months.
As you can see, there is a lot to gain by keeping your savings in pension environment.
So what do you think about those pension changes? Do you believe you can benefit from them?
Are you happy to sacrifice a little bit of your current income to prolong life of your pension fund?
Let me know in the comments below.
Also, if there is any particular area you find confusing, or difficult to grasp, or you would like for me to explain in more details,
leave me a message or a comment. I always reply to all messages personally.
If you still find this area a bit nightmarish due to rules, limits, caps, conditions, I am not surprised.
I have been doing this for over 20 years and every year there is something new to learn, update, change or redo.
if this is how you feel, but you want to make sure your retirement has been optimized to the full benefit
just drop me a line and we'll have a private chat.
And now I invite you to view some of my retirement videos mentioned today:
"Retirement income stream explained" - all the basics when you are starting your regular income stream
with your superannuation money. This is an older video of mine so please be gentle,
but still information is valid today.
Second recommended video to watch is:
"How to improve income and lifestyle in retirement"
This is my very first video to answer viewer's question,
which I want to run monthly,
so feel free to email me with your question.
See you next time and take care.