The minimum pension drawdown is a calculated amount that must be drawn down each financial year by a retiree.
This article explains all of the pension drawdown rules, the minimum drawdown rates based on age, as well as general drawdown advice.
What Is the Minimum Pension Drawdown?
The minimum pension drawdown is based on the pension drawdown factor associated with your age. When you start an account-based pension or transition to retirement pension, there is a requirement to draw down at least the minimum required pension each financial year.
There are several benefits to commencing a pension compared to leaving super in an accumulation account, with the only condition being that you receive the minimum pension drawdown.
Pension Drawdown Rates
The 2024 pension drawdown rates are based on the pension factor relevant to your age, as show in the table below. This table also includes the reduced pension amounts for the previous four years.
|Age||Standard Minimum Percentage Factor||Reduced Minimum Percentage Factor (2020 - 2023 FY inclusive)|
|Below Age 65||4%||2%|
|65 - 74||5%||2.50%|
|75 - 79||6%||3%|
|80 - 84||7%||3.50%|
|85 - 89||9%||4.50%|
|90 - 94||11%||5.50%|
|Age 95 and above||14%||7%|
Your pension balance is multiplied by your pension factor to determine your minimum pension drawdown each financial year.
Pension Drawdown Rules
Each pension, whether it be an account based pension or a transition to retirement pension, has both minimum and maximum income thresholds. Each financial year, you are required to drawdown a pension between the minimum and maximum amount (inclusive).
For a transition to retirement pension, the minimum threshold is 4% and the maximum is 10% each financial year and the calculation is performed on 1 July of each financial year that the pension is in existence.
The reason a TTR pension is always 4% and not governed by the table above is because once you attain age 65, you have met a full superannuation condition of release, meaning you automatically become eligible for an account based pension.
For an account based pension, the minimum threshold is based on the pension factor based on your age, as shown in the table above and the maximum is 100% of your account balance. That is, there is no maximum. Your pension payment amount on the upper-threshold is only limited by your account balance on any given day.
If you commence a pension part way through a year, the minimum drawdown amount is the pro-rata amount based on the number of days remaining in the financial year, divided by the total number of days in the financial year.
Pension Drawdown Strategies
There are several pension drawdown strategies that can be adopted, depending on your situation. Here are some of the most common:
Transition to Retirement Pension Drawdown Strategy #1
You might consider using transition to retirement (TTR) pension drawdowns to supplement work-related income if you have decided to reduce working hours down to, say, two or three days per week. In fact, the Government’s intention for the TTR income stream was to allow people to slowly transition into retirement.
Therefore, TTR pension income could be used to top-up your income so that you have the same after-tax income that you would have had if you had continued working full-time.
This video explains the benefits of a TTR Pension and how it works:
Transition to Retirement Pension Drawdown Strategy #2
Another pension drawdown strategy for TTR pensions is to implement a transition to retirement strategy. A TTR strategy is generally used by people who have attained age 60 and are still working full-time. The strategy works by salary sacrificing part of your taxable work-related income into superannuation and then replacing it with tax-free TTR pension income. You end up with the same income, but often have paid thousands less in tax when all is said and done.
Learn more about a transition to retirement strategy.
Account-Based Pension Drawdown Strategy #1
The most common account based pension drawdown strategy is to draw down only the minimum required pension income each year and then use bank savings, personal investments or other sources of income to cover additional income requirements. The benefit of this is that you are preserving as much as possible in the tax-free pension phase of superannuation.
Account-Based Pension Drawdown Strategy #2
Another account-based pension drawdown strategy is to receive higher levels of income – more than required – so that the excess income can be used to pay any residual down debt faster, or re-contribute it to a spouse’s account (or your own separate accumulation account) as part of a recontribution strategy to improve Centrelink entitlements and/or reduce potential tax on death payments.
Pension Drawdown Advice
The best pension drawdown advice will be determined by your income needs, your situation and any tax considerations. Generally, most people will make only the minimum withdrawal from their pension to cover living expenses, which would not only preserve as much wealth as possible in the tax-free pension phase, but also increase the longevity of your pension savings. To optimise your pension drawdown strategy, you should seek personal financial advice.
Our advice firm, Toro Wealth, offers personal retirement planning advice. If you would like to optimise your preparation for retirement, see how we can help by clicking here.
How To Calculate the Minimum Pension Drawdown
To calculate the minimum pension drawdown figure, you need to multiply your pension balance by the pension factor on 1 July of each year.
For example, if you are 67 years of age with a pension balance of $500,000, you would multiply $500,000 x 5% and your minimum pension income for that financial year would be $25,000. That is the minimum amount of pension payments you would need to receive for that year.
The pension payments can be received weekly, fortnightly, monthly, quarterly, half-yearly or annually, provided the total combined amount for the total year is at least the minimum calculated amount.
You would then perform the same calculation on the following 1 July, based on your pension balance and pension income factor as at that date.
The minimum pension calculator can be used to calculate your minimum pension drawdown.
If you commence the pension part way through the year, you would divide the annual amount ($25,000) by the number of days in the total year (e.g. 365), then multiply by the number of days remaining in the financial year.
Our financial planning firm, Toro Wealth, specialises solely in helping 50 to 70 year-olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.
Frequently Asked Questions
These are some frequently asked questions in relation to the 2023 minimum pension drawdown requirements in Australia.
What Is the Minimum Pension Withdrawal?
The minimum pension withdrawal is equal to your 1 July pension balance, multiplied by the pension factor associated with your age, as shown in the table above. The minimum pension factor ranges from 4% to 14%, depending on your age. The minimum pension withdrawal amount will be noted on your pension documentation, or on the account details page online.
Can I Take a Small Amount From My Pension?
Yes, you can take a small amount from your pension. The minimum amount that you must take from your pension is calculated by multiplying your account balance by the pension factor associated with your age – detailed in the table above. However, you are also welcome to take an additional small amount as a one-off payment in any given month, at your discretion.
Do I Have to Withdraw My Super When I Turn 65?
No, you do not have to withdraw your super when you turn 65. Your superannuation can remain in accumulation phase, indefinitely. By retaining your super in an accumulation account, you are not required to make any withdrawals, but you may if you wish. The tax on super earnings within an accumulation account is 15%.If you wish, you can convert your super to an income stream, but you are then required to receive minimum pension payments – plus all earnings are received tax-free.
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