Pension drawdown warning: Withdraw more or lose your tax break

The pension drawdown minimums have changed, so act now to avoid being caught out. (Source: Getty) (Getty)

Has your superannuation moved into the income phase? You need to act now or you’ll lose your tax break.

As of July 1, the 50 per cent minimum pension drawdown ‘discount’ has been removed. This allowed superannuants to cut their withdrawals to half of the usual age-based requirements.

These requirements apply to allocated or account-based pensions, market-linked pensions (also called term-allocated pensions), and transition to retirement pensions. In fact, it’s really only people in receipt of a defined-benefit pension - where you’re guaranteed a level of income - who can afford to stop reading.

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Just like after the credit crack-up, this income concession was put in place on pandemic panic, as super balances again dramatically shrunk. And it is being removed – once more – with share markets swinging wildly.

The high penalty you could pay

Fail to withdraw the minimum pension amount required in any given financial year and you’ll suffer financially. The Australian Taxation Office (ATO) deems that the income stream has stopped and all payments made during that financial year are treated as super lump sums for income tax and superannuation industry supervision regulations purposes.

You can’t rectify the shortfall at the beginning of the next financial year either.

The super tax concessions in retirement phase are huge – 0 per cent tax on earnings rather than 15 per cent while in the accumulation phase – so, the government wants you to remove your money.

Responsibility for ensuring minimum pension requirements fall to the super fund trustee. Hopefully, if this is not you, you will be warned. Even if the following tax year you make the appropriate withdrawals and tick all the ATO boxes, you have effectively started a new pension. That means the trustee must re-value assets in the current market conditions and recalculate the minimum pension. You can find more detail on the ATO website.

So, what are the reinstated withdrawal requirements? This is the ATO’s schedule.

How to calculate your new minimum pension withdrawal

These are the new aged-based rates.

(Source: supplied)

Your age is taken on July 1 in the financial year in which the payment is made; if the pension is newer than that, it’s taken on commencement day. Your account balance will depend on your pension circumstances. It will be the balance on July 1 in the financial year in which the payment is made or the balance on commencement day, if the pension was started later than that.

To calculate the minimum payment amount in the latter case, the ATO advises you to multiply the minimum annual payment amount by the remaining number of days in the financial year and divide by 365 (or 366 in a leap year). Note that, if you commence a pension on any day in June of a financial year, you don’t need to take out the full minimum. Your minimum drawdown then resets on July 1 each year and applies for that whole financial year.

It doesn’t matter how often you receive pension payments – monthly, quarterly or even less frequently - the annual minimum remains the same. Whatever you do, start multiplying your pension balance by your age-based minimum drawdown rate (you need to round your result up or down to the nearest $10).

Quite simply, if you are 64 years old and started an income stream on July 1, 2023 with $600,000, then your minimum pension amount would be: $600,000 x 4 per cent = $24,000. So, you need to withdraw $24,000 across the 2023-24 financial year. Crunch the numbers and up your income if need be so you don’t get caught out.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter and Instagram.

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