Damian Hearn
Technical

Pension Drawdown Relief – Adviser Opportunities

By Damian Hearn

The new minimum drawdown requirement for account-based pensions (50 per cent of the normal amount) is to be extended from the start of the 2009/2010 financial year. This provides new strategy opportunities for your clients…

The reduced minimum pension payment will apply to existing pensions and new pensions commenced up until 30 June 2010. The types of pensions covered still include:

  • Allocated (account-based) Pensions;
  • Transition to Retirement Allocated Pensions; and
  • Term Allocated Pensions.

Any clients who have not selected the minimum pension payment may now wish to take advantage of this opportunity and should notify IOOF prior to the end of the financial year. All clients who have selected a minimum pension will automatically receive the reduced minimum pension payment for the 2009/2010 financial year.

The extension provides an opportunity for financial advisers to proactively assist clients who are

  • concerned about satisfying the minimum pension payment for 2009-2010 financial year by having to sell investments assets and realise losses in a depressed market.
  • forced to alter their transition to retirement (TTR) strategy due to a reduction in the concessional contribution caps from 1 July 2009. For more information on the reduction in the contribution caps and how this may impact your clients retirement savings plans, please see this article from the May edition of @dviser magazine.

We have created the following opportunity matrix to help you revise existing strategies or recommend new strategies to your pension clients.

Financial Planning Strategy Opportunity Matrix

Advice Driver Focus Explanation Action Required
Asset Allocation Defensive Assets Restructure sell down strategy within the pension so defensive assets are sold down prior to growth assets to cover pension payments for the 2009/2010 financial year Restructuring sell down strategy
Disposal of non-super assets Triggering capital loses   Clients can consider using and selling down non-super assets to cover annual living expenses whilst reducing their pension payments to minimise realising growth assets.  By implementing this strategy clients have the opportunity to realise a capital loss in their own name (i.e. selling down assets) and allowing their super assets to work harder. Capital gains analysis Sale of assets with capital loss
Deferring pension payments Clients receiving monthly pension payments Clients can consider using existing cash reserves and/or surpluses to cover living costs over the next 12 months. Clients can replenish their cash reserves by receiving a minimum pension payment in June 2010. Alter pension payment frequency to June 2010
Expense  management  Actively Budgeting The opportunity exists for some of your clients to delay or reduce their discretionary spending (i.e. house renovations or overseas holiday) and living expenses for the new financial year. Clients can choose to receive the reduced minimum pension payment throughout the new financial or as an annual payment in June 2010.    Revise household budgets and planned discretionary spending Alter pension payment amount and/or frequency.
Deferring TAP pension payments Increased range in TAP pension payments   The range and inflexibility for pension payments for TAP’s can be overcome for the 2009/2010 financial year. The 50% reduction in the minimum pension payment will allow your client to reduce their pension payments by 55% of the standard pension payment (i.e. minimum pension payment is 45% of the standard pension amount). Your clients can receive the reduced minimum pension payment during 2009-2010 financial year and then receive an irregular pension payment prior to 30June 2010 should the need arise. Alter pension payment amount and/or frequency
Revising TTR strategy Reduction in concessional contributions Opt for reduced minimum   Making the decision to reduce the amount of salary sacrifice contributions as part of a TTR strategy from 1 July 2009 will avoid exceeding the contribution caps and paying excessive contributions tax. Your clients can reduce their pension payments by opting for the reduced minimum pension payment to coincide with the reduction in their salary sacrifice contributions. This avoids the need to cease and re-commence the pension for a further 12 months whilst accessing tax-free investment earnings (including capital gains) within the pension for the whole balance. At the next annual review, you can recommend to your client to reset their TTR strategy. For more information on the reduction in the contribution caps and how this may impact your clients retirement savings plans, please see this article from the May edition of @dviser magazine. Reduce concessional contributions from 1 July 2009   Alter pension payment amount and/or frequency Complete an impact analysis on your client’s strategy from 1 July 2009 and any determine any retirement savings gaps.
Asset Allocation within pensions Triggering capital losses for future benefit In some cases your clients may have exhausted their defensive assets within their pension or their asset allocation in comparison to their stated risk profile can be misaligned. To ensure your client has sufficient defensive assets, you can consider rolling their pension back into their superannuation account and restructuring the investment portfolio. This will ensure their investment portfolio will have sufficient defensive assets to pay pension payments for 2-3 years whilst the remaining funds can be invested in growth assets.  The benefit of realising the capital loss within their superannuation account is that the super fund should be able to hold the capital loss in the fund to offset other future capital gains which may provide the member of cash refund.  For more information on this strategy, please see this article form the November 2008 edition of @dviser magazine.   Sale of assets with capital loss   Reset pension strategy
Improve age pension entitlement Income Tested Clients Centrelink has confirmed that if the reduced pension minimum payment is received it will be counted for income test purposes to determine your clients age pension entitlement for the new financial year. As mentioned previously, your clients can consider using existing cash reserves and/or surpluses to cover living costs over the next 12 months to further reduce the income test assessment of these financial investments. In June 2009 your client(s) can receive an irregular pension payment to replenish their cash reserves. The irregular pension payment will be counted as income when determining your client’s age pension entitlement for the remaining days for the 2009/2010 financial year and will not be carried forward into the 2010/2011 financial year. Alter pension payment amount and/or frequency  

Summary

In these times of investment market uncertainty and constant changes to legislation, financial advisers can add significant value to their client’s strategies. The bottom line is that all pensions should be reviewed to take advantage of the benefits offered by the reduced minimum pension payment.