As part of the economic response package to the global impact of the coronavirus, the Federal Government has introduced into Parliament the Coronavirus Economic Response Package Omnibus Bill 2020 which includes a temporary reduction to the drawdown amounts from accounts-based pensions, which include Market Linked Pensions (also known as Term Allocated Pensions).
In the same way that the temporary reductions existed during the global financial crisis (GFC), the halving of the pension amount provides timely assistance for pension recipients to not have to sell-down assets in the fund in order to meet their pension obligations.
How the new laws apply
Clause 10 of Schedule 6 within the SIS Regulations is being amended to add the financial years commencing on 1 July 2019 and 1 July 2020. This provides that an amount is taken to have been determined in accordance with clause 1 (of the Sch.6) if it is:
- Not less than 45% of the amount (that is, 50% of the lower payment limit for a MLP payment established after 20 September 2007; and
- Not greater than 110% of the amount
To understand how this applies for market linked pensions, we include the following example.
Example – calculation of reduced pension amount
John (74) is in receipt of a MLP from his SMSF, with no reversionary beneficiary and a term to age 100. The balance at 1 July 2019 was $400,000. In accordance with the table in Schedule 6 of the SIS Regulations, with a remaining term of 26 years (payment factor of 16.89), the calculated annual pension amount is normally $23,680. John is allowed a +/- 10% variance to this amount for the 2019-20 financial year.
Due to the 50% reduced minimum applying to his MLP, the lower and upper ranges for the income stream are as follows for the 2019-20 financial year:
- Lower payment amount = $10,656 ($23,680 x 45%)
- Upper payment amount = $26,048 ($23,680 x 110%)
These measures are law applying for the 2019-20 and 2020-21 financial years, with Coronavirus Economic Response Package Omnibus Bill 2020 having received Royal Assent on 24 March 2020.
Note: the temporary pension reduction laws do not apply to defined benefit pensions being paid, such as lifetime complying or fixed term income streams.