Drawdown ‘relief’ easing

PENSION drawdown allows you to take an income stream from your savings while still leaving them invested in equity markets. The global financial crisis (GFC) has necessitated modification of drawdown rules in recent years, but this month’s new federal budget is changing them back.

The minimum pension withdrawals that you’re required to take are returning to their pre-GFC limits. These minimum drawdown amounts were cut back 50% to protect pension balances from drying up during three years of market drought. Withdrawing significant sums from pension savings in a falling market can rapidly erode your total balance.

During the GFC, many investors had to freeze or sell assets at a loss to keep up drawdown requirements. Some still do.

For the last three years, the government’s “drawdown relief” initiative has been a strategy of preserving capital. With the new budget, the government is scaling back drawdown relief, but expects the phase-out will help recoup the losses of capital sustained by retirees in the dog days of the GFC.

Beginning July 1 of this year, the minimum pension withdrawal will inch back 25% toward its previous level. By the same date in 2013, minimum withdrawals will be back to the normal rate. The drawdown percentages are age-based and will increase incrementally according to the table below.

Minimum pension withdrawals

Age at start of pension and July 1 each year	2010-11 minimum	2011-12 minimum	2012-13 minimum
Under 65	2%	3%	4%
65-74	2.5%	3.75%	5%
75-79	3%	4.5%	6%
80-84	3.5%	5.25%	7%
85-89	4.5%	6.75%	9%
90-94	5.5%	8.25%	11%
95+	7%	10.5%	14%

Minimum drawdown rules apply to account-based, allocated and term-allocated pensions.

The gradual nature of this transition is meant to provide an opportunity to recover some losses before the full drawdown is reinstated. For pensioners attempting to rebuild lost capital, any reduction of the usual threshold is welcome news. You can still benefit somewhat for now, but no reduced amounts will be allowed as of the 2012-13 financial year.

The inclusion of this change in the budget is not a great surprise. It projects a certain government confidence in super funds and optimism for stabilising (although nervy) markets.

Generally speaking, experts advise minimising drawdown income during rocky economic times to safeguard capital. This means less money for day-to-day lifestyle expenditures now, but a more secure long-term situation.

Withdrawals are best kept within the total yield of your various investments. This may include interest gains on cash accounts or income from rental property. Controlling withdrawals in this way can ensure capital from being slowly chipped away.