As we approach the 2023/24 financial year, there are two key changes for retirees to understand:
- The 50% reduction in minimum pension drawdown rate will no longer apply.
- The Transfer Balance Cap (TBC) will be indexed.
Keeping abreast of these changes will ensure retirees continue to receive their desired cash flow, in a tax effective manner.
Changes to Minimum Pension Requirements
Superannuation income streams are subject to rules which set a minimum and maximum amount that individuals must withdraw annually from their accounts. These requirements are designed to ensure retirees use their superannuation savings for the purpose it was intended: funding retirement. As a result, retirement savings gradually move from a tax-free to a taxable environment – a positive for Government revenue, but a negative in the eyes of retirees.
During the 2019/20 financial year, the Australian Government temporarily halved the minimum rate across all retirement age brackets. These changes were introduced to provide financial relief to retirees following the severe downturn in financial markets caused by the outbreak of COVID-19. The reduction in drawdown rates preserved account balances, providing them with an opportunity to benefit from the eventual recovery in asset prices. This aided the recovery in retirement balances for many Australians.
This temporary 50% reduction is in place until the end of the current financial year. From 1 July 2023 retirees will be required to meet the standard minimum rates. Those who have been electing to draw the minimum amount will be impacted the most, as they will now need to draw twice as much as they have in recent years.
Minimum percentage of account balance factors, by age
The trustee of public offer funds will generally ensure the minimum is met, though members should ensure there is sufficient cash in their pension accounts. This can help avoid being subject to trustee directed sales which may result in an unwanted disposal of an asset.
Self-managed super funds (SMSF) members will need work with their advisers to ensure they meet the new minimums. This can be achieved by either increasing regular withdrawal amounts or taking an increased lump sum. It is imperative that retirees meet the minimum pension requirement in each year as financial penalties may apply to those who do not. The ATO may deem that the income stream ceased for income tax purposes resulting in all investment earnings being treated as assessable income for the fund.
Understanding the Indexation of the Transfer Balance Cap
The Transfer Balance Cap (TBC) was introduced by the Australian Government on 1 July 2017 to limit the amount of an individual’s super that can be transferred into a superannuation income stream, once they had met a condition of release. The TBC was initially set at $1.6 million and was intended to prevent individuals from holding excessive wealth in the tax-free superannuation environment.
To ensure the TBC keeps its real value over time the TBC is indexed; the cap increases with inflation (all groups CPI), in multiples of $100,000. The first increase arrived on 1 July 2021 with the general TBC increasing by $100,000 to $1.7 million. Based on recent inflation numbers, the general TBC is expected to rise by another $200,000 to $1.9 million from 1 July 2023.
However, it must be noted that not all individuals are entitled to the full TBC indexation amount. Every individual has a personal TBC which is distinct from the general TBC. While the general cap will increase to $1.9 million, the ATO will take the following into account when determining an individual’s entitlement to the indexation:
- the financial year when you start your transfer balance account (TBA), and
- your highest ever balance in your TBA.
Individuals are able to access this information via the ATO portal through myGov or their registered tax agent.
Below we consider how the indexation would apply across four different situations. As at 1 July 2017:
- Caleb started a pension with $1.6 million and took a commutation of $200,000 on 1 April 2022.
- Gabriel started a pension with $1 million and commenced a second pension of $300,000 on 1 July 2022.
- Kylie started a pension with $1 million and has not commenced any new pensions since.
- Jimmy had a total super balance of $1.5 million but had not commenced a pension as he had not met a condition of release at the time. He will reach age 65 on 1 July 2023 which is when he will commence a pension, with his super balance having since grown to $1.9 million.
These examples illustrate how an individual’s personal TBC can differ, ranging from $1,600,000 to $1,900,000.
A superannuation income stream is a highly tax effective vehicle that can be used to provide income in retirement. Both the general and personal TBC’s need to be considered when determining the amount an individual can hold in the tax-free superannuation environment. Careful planning will ensure retirees take maximum advantage of the concessions available.