Q: With an allocated pension for a retired person over 65 years old, there is a minimum annual drawdown of 6 per cent or 7 per cent depending on age and no tax is applicable and no tax return necessary. While no maximum drawdown amount is specified, if for example, an additional one-off drawdown was made to replace a motor vehicle or conduct home repairs, is that amount treated any differently? In that, would tax be payable and/or a tax return be necessary?
A: Allocated pensions (sometimes called account-based pensions) are wonderful things. Your investment earnings are tax-free. Your regular payments are tax-free. And if you make a lump-sum withdrawal, then that’s tax-free as well. All that tax-free goodness, though, comes with a few traps, of course.
As you point out, you need to draw a minimum percentage of the fund balance each year as a pension. That usually ranges from 5 per cent for someone aged between 65 to 74, right up to 14 per cent when you turn 95. But because we live in the era of Covid-19, the government has halved those minimum percentages for the current financial year. For example, a 70-year-old only need draw a
minimum of 2.5 per cent in 2020-21.
Why the minimum pension rates? Because allocated pensions are intended to provide retirement income, not function as somewhere to accumulate tax-free dollars to leave as an inheritance. Over time, as the minimum pension percentage rises, the balance of your account will fall. Eventually, if you hang around long enough, it will run out. So, the answer to your question is this – you won’t pay tax on a lump-sum withdrawal, and it won’t have any impact on whether or not you need to lodge a tax return.
Back to those traps, however. If you do make a withdrawal, it will (obviously) reduce your account balance. Next financial year, that means your pension will be lower. If you’ve got surplus income, then that’s okay. If you don’t, it means you’ll need to draw more from your pension in future years to meet your needs, and you’ll shorten its lifespan. Remember, you can’t add money to an allocated pension, and once you reach a certain age, it’s not possible to add to your superannuation either. I’d check with your fund and ask them to estimate the impact of making a withdrawal on next year’s pension, and make sure you’re comfortable with the outcome.
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.