Early super access, drawdown, deeming measures: what the emergency stimulus means for you
Some fear the early release of super could cause liquidity pressures for major funds.
The federal government announced on Saturday the second round of its stimulus package to cope with the economic and social upheaval caused by the coronavirus.
Measures to assist Australians suffering hardship include: early release of superannuation; temporary reduction of superannuation minimum drawdown rates; and reduction in social security deeming rates.
1. Temporarily reduce superannuation minimum drawdown rates: The minimum pension requirements for 2019/20 and 2020/21 will be re-set to half the normal rates.
2. Reducing social security deeming rates: Reducing the social security deeming rates 50 per cent for the 2019-20 and 2020-21 income years.
3. Early release of superannuation: Special access to existing superannuation balances will be available to those who have experienced significant reductions in their income or are unemployed or who have been retrenched.
While the measures have received broad support from the financial services industry, including the SMSF Association and the Financial Services Council, some have expressed concern that the early release measure could present a liquidity problem for major funds.
"This comes at a time where the rush to cash has seen equity and debt investment asset values contract," says Jonathan Steffanoni, a partner at QMV Solutions, a consultancy firm.
"The sudden and acute economic contraction has been, and may become chronic, and continue to be severe.
"While typically long-term investors, the increased demand for benefits will require that superannuation funds closely monitor liquidity of cash reserves - and possibly adjust asset allocations and sell down some assets in a market which will realise potentially significant capital losses."
Industry Super Australia (ISA) says ealy access should be "approached with extremem caution" and be "the last report" for financial stressed Australians. ISA analysis shows a30-year-old who accesses $20,000 from super now could lose about $100,000 when they hit retirement and a 40-year-old could lose more than $63,000.
"Members should tread carefully and only think about cracking open their super after they’ve taken up the extra cash support on offer from the government," ISA chief executive Bernie Dean says.
“Members need to know that taking your super now is like selling a house at the bottom of the market- you’ll lose money you would probably claw back overtime”
To help understand what the new measures mean for you, we've reached out to two SMSF specialists - Liam Shorte, SMSF specialist advisor at Verante Financial Planning and The SMSF Coach and Lyn Formica, head of SMSF technical and education services at Heffron Consulting – for their expertise.
1. Temporary reduction in minimum drawdown requirements
Lyn Formica, head of SMSF technical and education services, Heffron Consulting
Similar to the approach taken in the 2008/09 Global Financial Crisis, the minimum drawdown requirements for account based pensions and similar products will be temporarily reduced by 50 per cent for the 2019/20 and 2020/21 years.
The revised rates for the 2019/20 and 2020/21 years will be as follows:
At first glance this appears counterintuitive – all other measures in the announcement were about putting more money in people’s hands. The policy rationale is that one very obvious consequence of the current situation is that investment markets have fallen considerably and continue to do so. Many superannuation pension recipients will have been concerned about selling assets to make pension payments when their fund (or pension account in a large fund) did not have enough cash to make the payments. This measure will mean that those who don’t need additional income will not be required to take it out of their fund – potentially relieving some pressure to sell assets.
Whilst we are yet to see the amending legislation, we expect this change will work as follows:
What type of pensions will qualify for the reduced drawdown rates?
The Government’s Fact Sheet says that the reduction will apply to account-based pensions and similar products. We expect the Government means:
- account-based pensions (including transition to retirement income streams),
- allocated pensions (including transition to retirement pensions), and
- market linked pensions (also commonly called term allocated pensions).
We do not expect the relief to apply to lifetime or life expectancy pensions.
Will all superannuation funds (including SMSFs) offer the reduced drawdown rates?
We expect all superannuation funds, including SMSFs, will be able to take advantage of the reduced drawdown rates. However, there may be some SMSFs with very prescriptive minimum pension rules in their governing rules/trust deed. Funds in this position would need to amend their trust deed to take advantage of the 50 per cent reduction.
How will the 50 per cent reduction affect pensioners who have already drawn an amount equivalent to their reduced amount before the announcement?
These pensioners will not be required to draw any further pension payments before 30 June 2020.
If a pensioner has already drawn more than their reduced minimum, can they return the surplus pension payments to the fund?
No, there will not be a mechanism to return surplus pension payments. It may, however, be possible for some clients to recontribute the surplus (if they are eligible to contribute and the amount will be within their contribution caps).
What if a pensioner had say elected to treat all payments from their SMSF as pension payments up to their minimum and then lump sums from their accumulation account? How would payments taken before today be treated?
In our view, payments should be processed accordingly to the rules which applied at the time of the payment.
For example, before 1 July 2019, Craig instructed his fund to treat any payment he took from the superannuation fund as follows:
- firstly, a pension payment (up to the minimum payment amount) and then
- a lump sum from his accumulation account once the minimum had been met.
Craig’s minimum for the 2019/20 was originally $40,000 (ie $1m x 4 per cent). He took a payment of $45,000 on 1 March 2020. His reduced minimum is now $20,000. How should the $45,000 be treated?
On the basis of the election he made for the 2019/20 year, the first $40,000 will be a pension payment and the remaining $5,000 will be a lump sum from his accumulation account.
Example provided by Liam Shorte, Verante Financial Planning
Example – 50 per cent reduced minimum pension options
Jenny (66) has an account based pension from her Self Managed Super Fund – The Morrison Pension Fund. The balance of her pension at 1 July 2019 was $800,000, which requires her to take a minimum pension payment for the 2019/20 financial year of 5 per cent ($40,000). Her husband Scotty is still working but will have a large pension on retirement.
Thanks to the Stimulus Package Part #2 she can take a 50 per cent reduced minimum pension for 2019-20, meaning that Jenny is only required to draw down $20,000 before 30 June 2020. As Jenny still needs the income and usually takes her pension every month so has already taken $30,000 for the year. There is still room to use a strategy and benefit. Jenny can now stop the monthly payments for April-June and take a Partial Lump Sum Commutation of $10,000 to cover her income needs but this will now reduce her Transfer Balance Account by $10,000 as well freeing up the ability to add more to pension phase at a later date (such as on the death of Scotty)
If as of 1 July 2020 Jenny’s Pension account has dropped to $600,000 as a result of the impact of the coronavirus on financial markets, Jenny’s now has the option to do some planning for 2020/21 financial year as well. Based on the 1 July balance Jenny’s 50 per cent reduced minimum pension for the 2020-21 financial year is calculated at $$15,000 or $600,000 x 2.5 per cent. So, she can take the $15,000 via monthly pension payments of $1,250 and her remaining income needs for the year of $25,000 via combination of one or more Partial Lump Sum Commutations during the 2020/21 year. Plan ahead with your adviser to document this properly.
The result of this change is that Jenny can still meet her income needs but will be able to free up some of her Transfer Balance Cap for future use.
2. Changes to social security deeming rates
Liam Shorte, SMSF specialist advisor, Verante Financial Planning and The SMSF Coach
In Stimulus Package #2 the government approved new lower Deeming Rates for Centrelink/DVA income tested benefits. The measure is a further 0.25 per cent drop in Lower Rate to 0.25 per cent and the Higher Rate to 2.25 per cent.
On 12 March, the Government had already announced a 0.5 percentage point reduction in both the upper and lower social security deeming rates. The Government will now reduce these rates by another 0.25 percentage points.
As of 1 May 2020, the upper deeming rate will be 2.25 per cent and the lower deeming rate will be 0.25 per cent. The reductions reflect the low interest rate environment and its impact on the income from savings. The change will benefit around 900,000 income support recipients, including around 565,000 Age Pensioners who will, on average receive around $105 more of the Age Pension in the first full year the reduced rates apply.
What are the new deeming rates?
3. Temporary early access to superannuation
Lyn Formica, head of SMSF technical and education services, Heffron Consulting
As a general rule, preserved superannuation benefits may only be accessed in lump sum form once members turn 65 or reach their preservation age and retire (or satisfy some other condition of release such as permanent incapacity, terminal illness etc). However, in times of financial distress, there are some circumstances under which members may be able to bypass these rules and access their super earlier.
Unfortunately the current rules which allow access to those suffering from “severe financial hardship” or qualify on “compassionate grounds” are very narrow and release has only been available under very limited circumstances.
The Government has today announced a quite significant, but temporary, extension to these rules. A copy of their Fact Sheet can be found here.
Who is eligible for the new rules?
A new opportunity for early release will be available to individuals who:
- are unemployed, or
- are eligible to receive a Job Seeker Payment (previously known as Newstart Allowance), youth allowance for job seekers, parenting payment, special benefit or Farm Household Allowance, or
- on or after 1 January 2020:
- were made redundant, or
- had their working hours reduced by 20 per cent or more, or
- for sole traders, their business was suspended or there was a reduction in their turnover of 20 per cent or more.
Further information is needed in relation to how this 20 per cent reduction is to be determined, but it appears it will be by comparing current hours/turnover with the average for the period 1 July 2019 to 31 December 2019.
Importantly, there is no requirement that the individual is already receiving Commonwealth income support payments and there is no waiting period. The payment can be requested immediately once the new rules come into effect (see below).
There are no income or assets tests. Even someone with a very high salary who remains employed and has other assets could access this payment as long as their salary has been reduced by 20% after 1 January 2020. While they might choose not to, many could well do so if their superannuation is more easily accessed in cash than other assets and if their reduced income is not sufficient to meet living costs that cannot be adjusted quickly to reflect their new situation (eg large mortgage payments, rent etc).
How much will be available?
Eligible individuals will be able to access up to $10,000 before 1 July 2020. A further amount of up to $10,000 will be available from 1 July 2020 but only for approximately three months after that time (exact timing to depend on the passage of legislation).
Only one payment will be permitted in each financial year.
How do individuals apply for the new payment?
To access benefits held in funds other than SMSFs, the process will be as follows:
- Individuals will be able to apply directly to the ATO via their myGov account.
- Once the ATO has processed the application and confirmed the individual’s eligibility, they will provide both the individual and their superannuation fund with a determination.
- On the basis of that determination, the fund will then make payment to the individual.
The Fact Sheet describes this measure as targeting those who have suffered a loss of income due to Covid-19 but there is no indication whether one of the questions that will be asked by the ATO in the relevant application will be whether the reduction in income relates to this specific event.
Individuals do not need to apply directly to their superannuation fund. However, it would be wise to double check that the fund has the right bank account details and proof of identity documents to ensure that the money can be paid quickly.
While we understand the eligibility rules for SMSF members will be the same as for members of non-SMSFs, separate arrangements are being made and there may be a different process to follow when moneys are to be released from an SMSF. Further guidance on the application process for SMSF members is to be made available on the ATO website in due course.
When will amounts be available?
Applications will be able to be made from mid-April 2020. However it is not yet clear how long it will take for the ATO to process an application and for the fund to make payment to the individual.
Note that anyone who simply withdraws money from their SMSF now, or even after mid April but does not follow the right process, will be subject to the usual rules. This could be substantial tax and other penalties – it is vital to wait until the new rules are in place.
How will these payments be taxed?
Amounts released under this new ground for early release will be paid tax free and will not affect Centrelink or Veterans’ Affairs payment eligibility.
This is unusual – currently amounts released on compassionate grounds or on the basis of severe financial hardship are taxed which can mean up to 20 per cent + medicare for many people.
What if the individual is already receiving income from their superannuation fund from a transition to retirement income stream?
Many people in this position will not need to access the new payment – they will simply increase their transition to retirement income stream payments if they need more income to supplement a reduced salary. However, transition to retirement income streams have anupper limit on pension payments (10 per cent) of the pension balance at the previous 1 July). Someone needing more than this amount who meets the criteria above could apply for one of these payments.