I n February this year, the Government announced it was planning to suspend the minimum drawdown requirement for account-based pensions for the second half of 2008-09, through a 50 per cent reduction in the minimum payment amount.

Regulations enabling this 50 per cent reduction have since been issued.

The Government announced in the Budget that the 50 per cent reduction in the minimum payment is to be extended to the 2009-10 financial year. Regulations enabling this change have not yet been introduced.

What does this reduction mean?

This is good news for people with account-based pensions, such as allocated pensions.

These pensions provide a regular income in retirement, which will increase (or decrease) with investment earnings, and decrease as people take out income payments. In a nutshell, a person’s account balance will be impacted by how the underlying investments perform as well as how much a person takes from their account as income.

Further, these pensions are designed such that they require a minimum amount to be paid as income each year. The minimum annual amounts that need to be taken are based on a person’s age (see table below).

Given the recent economic conditions, some people may have been faced with the prospect of selling assets and realising losses in a dropping market in order to make these pension payments.

In response to this, the Government has effectively suspended the minimum drawdown requirement for the second half of 2008-09.

This suspension has been affected by the introduction of a 50 per cent reduction in the annual income requirement for the 2008-09 financial year.

What income streams does this reduction apply to?

The types of income streams this reduction applies to are account-based, allocated, and term allocated (market-linked) pensions and annuities.

The reduction will also apply where these income streams were commenced using the Transition to Retirement (TTR) condition of release.

Note that there has been no change to the 10 per cent maximum limit applicable to TTR income streams.

Further, the 50 per cent reduction applies regardless of the income stream’s commencement date, including those commenced in earlier financial years. This also means the 50 per cent reduction will apply if the income stream is commenced at any time during the 2008-09 financial year.

Where the income stream commenced after July 1, 2008, the 50 per cent reduction will be applied to the pro rata minimum that would

otherwise apply.

Reminder: No minimum payment will be required for the 2008-09 year if the income stream commences on or after June 1, 2009.

What does this mean for people who have already taken at least 50 per cent of the minimum pension?

People who have already taken at least 50 per cent of their minimum pension in the current financial year can choose to suspend income payments for the rest of the financial year.

For example, on July 1, 2008, Bill had $100,000 in his allocated pension. Therefore, based on his age, his minimum pension drawdown for the 2008-09 financial year is $5,000.

He has already taken out $2,500 so far during the 2008-09 financial year. As such, as long as his income needs for the year have been met, he can choose not to receive any more pension payments for the rest of the financial year.

For people who have not yet received 50 per cent of their minimum pension?

People who have not yet taken at least 50 per cent of their 2008-09 minimum pension amount will still need to take at least this amount by June 30, 2009.

What about next financial year?

The Federal Budget has extended this measure to include the 2009-10 financial year as well.

What about Centrelink customers?

Centrelink customers who elect to receive the lower minimum pension should contact Centrelink to have their future entitlements reassessed.

This change will not affect the amount of Centrelink entitlements already paid to the customer, as this calculation would have been based on a person receiving a particular level of income over a 12-month period (eg, at least the minimum as at July 1, 2008).

However, if the customer is either ineligible for Centrelink benefits, or receiving a reduced rate of pension based on the Centrelink income test, what may change is the level of Centrelink entitlements payable after the person elects to receive the lower minimum.

The ‘annualised’ income payment from their account-based pension, following the pensioner’s election to receive a lower minimum pension payment, is likely to be lower than that struck earlier, and hence income-tested Centrelink entitlements may increase as a result.

The responsibility to contact Centrelink rests with the customer. Product providers will not be automatically informing Centrelink of reductions in minimum pensions.

John Perri is technical services manager at AMP TapIn.