You know that the worst of Covid is behind us when the rules for your super start to bounce back to normal. On July 1 this year, we saw yet another temporary Covid measure come to an end. Minimum income stream payments are back to where they were in 2019.
Upon retirement, many people choose to take at least some of their super as an ongoing ‘account-based’ income stream withdrawn over several years, rather than as a single lump sum taken immediately upon retirement. (These ongoing payments are sometimes called a ‘pension,’ but here we will call them income streams to avoid confusion with Centrelink pensions).
Choosing an income stream has many advantages. One of the main ones is that, for retirees over the age of 60, agreeing to take your super as an ongoing income stream means that earnings on the money that remains within super are not taxed. This feature has an obvious purpose: to encourage people to use income streams (and thus to discourage them from making lump sum withdrawals early in their retirement).
To make sure that people do not abuse this advantage, the Commonwealth requires retirees who use an income stream to withdraw a minimum amount from their savings each year. The minimum you must withdraw changes over time – the older you get, the higher the minimum.
During the 2019-20 year, these minimum amounts were reduced by 50%. The reduction remained was then kept in place until June 30 this year. However, as of 1 July 2023, the minimum amounts have returned to what they were previously, as shown in this table from the Moneysmart website:
| Age | Annual payment as % of account balance 2019-20 to 2022-23 income years |
Annual payment as % of account balance 2023-24 income year |
| 55—64 | 2% | 4% |
| 65—74 | 2.5% | 5% |
| 75—79 | 3% | 6% |
| 80—84 | 3.5% | 7% |
| 85—89 | 4.5% | 9% |
| 90—94 | 5.5% | 11% |
| 95+ | 7% | 14% |
Depending on the provider, there is no requirement that a retiree ‘lock-in’ a set percentage for coming years. This means that the amount that is taken each year can be changed according to your circumstances – especially for people managing their own super fund, where they also control the income stream as well.
Our experience and observation is that people can be a little too timid in the early part of their retirement. There is often a tendency to take the bare minimum of, say, 5% for a person retiring at 65. New retirees are very worried about running out.
If you think about this, taking just 5% per year means your existing super will last for more than 20 years (if you take 5% every year, you will be withdrawing a smaller amount each year and so the current amount last for more than 20 years – but we do not need to get into these technicalities right now). But your super will not remain uninvested for those 20 years, so unless something really goes wrong, your super will continue to earn money even while you are drawing a pension. That is why it is usually quite safe to withdraw an amount larger than the minimum each year.
This should be great news, as it means that you can enjoy the earlier years of your retirement more than you would if you just withdrew the minimum each year. Whether your super balance actually falls from year to year will depend on what earnings you can achieve on the money you have not withdrawn. But you can see that if the earnings on your super are more than 5%, and you only withdraw the minimum 5%, your super balance will actually keep going up each year.
You might like this, but it is perhaps contrary to the point of your super in the first place –to fund your retirement. Because of this, it can make sense to withdraw an amount each year that (i) uses the investment earnings for that year and (ii) also draws down some of the capital each year. Yes, your super balance will fall somewhat each year – but your super will not need to last as long as each year goes by, either. And the reality is that our living expenses do tend to fall as we move further into retirement, as it is the earlier years of retirement in which we (should!) do the things we have really been looking forward to retirement for. Like travel.
So, talk to us about how much you should draw each year in your retirement. Just don’t be surprised if we recommend you splurge a little more than you were going to!