Showdown looms over super drawdown rules

The government’s plan to extend softer super drawdown rules for another year opens the door for a growing campaign to cut drawdown requirements permanently.

Wayne Strandquist, president of the Association of Independent Retirees, says ‘people are living much longer and they are trying to manage their retirement incomes for extended periods – at the same time investment markets have remained volatile and the cost of living is increasing too’. Picture: Jonathan Ng

A federal government plan to extend a reduction in the amount that retirees must draw down from their superannuation funds is set to unleash wider calls for a permanent reduction in the requirement.

Seniors have been lobbying to cut the drawdown rates permanently. In its pre-budget submission this year the Association of Independent Retirees called for a major cut in the rates for elderly Australians.

At the beginning of the Covid-19 crisis in March 2020 the annual super drawdown rate – which dictates how much in percentage terms retirees must withdraw from super each year – was cut in half for all age groups.

But the AIR now says a “change is needed to the minimum drawdown percentage for retirees in later years due to the rapidly increasing longevity of older retirees who need more funds for a longer retirement and increasing age care costs”.

Wayne Strandquist, the AIR’s national president, has expressly called for relief among older investors on the basis that the drawdown rules were made in a very different environment when introduced in 2016.

“People are living much longer and they are trying to manage their retirement incomes for extended periods – at the same time investment markets have remained volatile and the cost of living is increasing too,” Mr Strandquist says.

The AIR has outlined a plan for a change in the age ranges under the current system and a lowering of the minimum drawdown percentages once a retiree has reached 75 years.

Support for permanently reducing the drawdown rates has been building on a range of fronts – retirees hate having to sell shares or other investments that may have fallen in value to satisfy the rules.

At the same time investors are worried about the long-term aged care expenses they may face as longevity continues to extend across the nation.

Ian Henschke, of National Seniors Australia, says many older members of his group want to see a structural change in the drawdown settings.

Recent surveys among his members continually show older members are worried about outliving their savings.

“Our 2019 national seniors social survey indicated that one in five participants frequently worry about outliving their savings and investments,” he says.

Following the implementation of the drawdown rules in 2016, Treasury requested a review of the regime be set for 2021. That review has yet to take place.

Retirees must make minimum payments under pension income stream rules – in turn that means they must withdraw up to 14 per cent of their entire super each year depending on their age.

At present, under the 50 per cent reduction arrangements, the maximum rate is 7 per cent. If retirees do not abide by the rules they can face tax on their superannuation payments.

The AIR plan focuses on lifting the age limits on which different bands of drawdown demands are set – the plan lifts key age categories by five years.

According to the AIR submission: “The association understands the current drawdown rates were set to prevent people from using superannuation as a vehicle for wealth transfer to future generations.

“This issue has now been overcome with the cap on funds in pension mode.

“Implementing this recommendation will have no cost impact to the budget expenditure. In fact, will be revenue positive as it is estimated that implementing this change will generate as much as $200m savings by delaying the commencement of Age Pension and related age care costs for many self-funded retirees.”

More than 1.8 million retirees are expected to benefit from the changes which have been confirmed by Treasurer Josh Frydenberg and are expected to be detailed in the federal budget, a move that will bring the lowered rates out to June 2023.