COVID-19: Temporary 50% Pension Minimum Reduction

This article contains information on the COVID-19 Temporary 50% pension minimum reduction.

Overview

Significant losses in financial markets as a result of the Coronavirus (COVID-19) crisis are negatively affecting the account balance of some retirees’ superannuation pension or annuity. To assist retirees, the Government has reduced the minimum annual payment required for account-based pensions and other income stream products.

NowInfinity Pension documents have been updated to the new pension drawdown rates to comply with Coronavirus Economic Response Package Omnibus Bill 2020.

Age Default Minimum Drawdown Rate (%) Reduced Rate by 50% for the 2020 and 2021 Financial Years
Under 65 4% 2%
65-74 5% 2.5%
75-79 6% 3%
80-84 7% 3.5%
85-89 9% 4.5%
90-94 11% 5.5%
95 or more  14% 7%

 

FAQs

Question 1:

When did the government pass the law on this measure? How long will this temporary reduction in minimum drawdown rate last?

Answer 1:

This measure was passed through the Coronavirus Economic Response Package Omnibus Bill 2020 by both Houses of Parliament on 23 March 2020 and received Royal Assent on 24 March 2020. This temporary 50% pension minimum reduction measure applies to the 2019-20 and 2020-21 financial years.

Question 2:

What is the purpose of this measure, how will reducing pension drawdowns help retirees?

Answer 2:

This measure is designed to assist pension account balances to recover from unrealised losses associated with the economic shock of the Coronavirus health crisis. It allows retirees to reduce their drawdowns, protect capital values and avoid the forced sale of assets in loss positions to fund compulsory pension minimum payments. The Government introduced similar measures during the Global Financial Crisis (GFC, specifically 2008-2011 (50% reduction) and 2011-13 (25% reduction)).

Question 3:

What type of pension products will be supported for this 50% minimum pension reduction?

Answer 3:

This 50% pension minimum reduction measure will apply to:

  • account-based pensions (including TRIS)
  • allocated pensions (including TRIS)
  • market-linked pensions (also known as term allocated pensions)
  • It does not apply to legacy defined benefit pensions such as lifetime or life expectancy pensions.

Question 4:

How does the reduced minimum annual payment apply for market-linked pensions (also known as term allocated pensions) for the 2019–20 and 2020–21 financial years?

Answer 4:

Market-linked pensions (also known as term allocated pensions) have a minimum and maximum payment limit, and the actual pension payment drawn for the year must be within these limits.

The minimum/maximum payment limit, which is normally 90%/110% of the calculated standard annual pension level under a prescribed formula, has been reduced to 45%/110% for the 2019–20 and 2020–21 financial years as part of the government’s temporary reduction of superannuation minimum payment amounts.

Question 5:

I am retired and receive an account-based pension from my SMSF. My account-based pension balance has been badly affected by the losses in the financial market because of the COVID-19 crisis. I would like to reduce my pension payments. Does the SMSF still need to pay me the minimum amount that was calculated based on my account balance at 1 July 2019?

Answer 5:

No. You can reduce the minimum amount your SMSF pays you by up to 50% of what is otherwise required based on your account balance at 1 July 2019 for the 2019–20 financial year. To assist retirees, the Government has reduced the minimum annual payment required for account-based pensions and annuities, allocated pensions and annuities and market-linked pensions and annuities by 50% in the 2019–20 and the 2020–21 financial years.

Question 6:

I am retired and receive an account-based pension from my SMSF. My account-based pension has already paid me more than the reduced minimum annual payment required for the 2019–20 financial year. Is my SMSF required to continue making pension payments to me for the remainder of the year?

Answer 6:

No, if a member does not want to receive any further pension payments they can cease being paid the pension for the remainder of the year.

This has to be communicated to the Trustee. It is important the SMSF trustee considers its trust deed, documents any changes and the reason for the change. This could be recorded in a minute or other contemporaneous document.

Question 7:

My trustees have already signed the original pension reviews created on 1 July 2019 but before 24 March 2020. Now the pension minimum has been reduced by the Government, should I inform them and get them to re-sign the new ones?

Answer 7:

There is no compliance issue associated with an overpayment of the pension minimum. However, it is prudent to inform your trustees about the minimum reductions, ideally document this through a new pension review minute, so trustees can either stop the pension payments if it already exceeded the minimum or consider commutations/lump sum payment for new payments on or after 24 March 2020, to claw back TBAR credits / protect capital values for pension accounts.

Question 8:

I am retired and receive an account-based pension from my SMSF. My account-based pension has already paid me more than the reduced minimum annual payment required for the 2019–20 financial year. Is the amount over the minimum considered superannuation lump sum amounts?

Answer 8:

Pension payments that you have already received cannot be re-categorised. Accordingly, payments made from your account-based pension in excess of the new reduced minimum annual payment required for the 2019–20 financial year are pension payments (that is, superannuation income stream benefits) for the year and not superannuation lump sums.

Payments made after 24 March 2020 and there was documentation (such a minute or resolution) stating that once the minimum was met, then the excess over and above the minimum will be treated as a lump sum, it is possible to process the payments as a lump-sum from the accumulation or as a partial commutation to the retirement phase income stream.

Question 9:

My SMSF now has a considerable unrealised capital loss as a result of the recent downturn in the global economy. Can I re-assess my member’s super benefits that support the pension to work out the reduced minimum annual payment amount?

Answer 9:

The changes only provide for a halving of the minimum annual payment requirement as applicable to the pension account balance at:

  • 1 July 2019 (or a later commencement date during the year) for the 2019–20 year.
  • 1 July 2020 (or a later commencement date during the year) for the 2020–21 year.

Regardless of losses incurred, you cannot recalculate the pension based on a lower account balance of the fund at another point in time.

Question 10:

I am a trustee of an SMSF. I have paid more than the reduced minimum annual payment amount for 2019–20 financial year to a member of my SMSF. Can the member put the amount above the reduced minimum annual payment back into the SMSF?

Answer 10:

The member of the SMSF can put the amount back into the SMSF as a superannuation contribution if they are eligible to make superannuation contributions, subject to age restrictions and contributions caps.

  • Early release of Super
  • Providing Rental Relief
  • Related Party Limited Recourse Borrowing Arrangement Relief

Worked Example

Andrew was 66 as at 1 July 2019 and his account-based pension balance was $1,222,220. 

Original Pension Minimum New Pension Minimum Incorrect Calculation
$1,222,220 x 5% = $61,110 $1,222,220 x 2.5% = $30,560 $61,110 x 50% = $30,555
The amount is rounded to nearest $10 The amount is rounded to nearest $10 Potentially underpaying the minimum by $5.

 

Further Reading

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