In response to COVID-19, the Government has announced changes including reducing super pension drawdown rates, expanding early release of superannuation, and cutting age pension deeming rates.
Some of these changes require legislation, which Parliament is sitting to consider today.
Update: The Coronavirus Economic Response Package Omnibus Bill 2020 has passed the Parliament, with amendments but none relating to the superannuation measures.
Update – Accessing super early should be “last resort”: ISA
Industry Super Australia (ISA) says accessing superannuation early should be “approached with extreme caution and only as a last resort”.
Analysis by ISA found that someone currently aged 20 who accesses the full $20,000 allowed under the changes could lose over $120,000 from their retirement balance. For some aged 30, its $100,000 and for someone aged 40 its $63,000.
“The government has provided a significant program of wage stimulus measures, including increasing welfare support payments, which members should consider exhausting before tapping into their super,” says ISA.
“For some members their short-term financial survival might rely on the ability to access the up to $20,000 form super that the scheme allows.”
ISA says it will be working with the Government to ” ensure this scheme is delivered successfully and without harming Australia’s national savings pool”.
Co-ordination between funds, the Government and the ATO will be “vital”, ISA says, to ensure the new rules operate efficiently.
“The last thing anyone wants is for stressed members to face prolonged delays for access to their super due to administrative bottlenecks.”
Temporary reductions in superannuation pension minimum drawdown rates
Like what was done during the GFC, the Government has announced a temporary reduction in the minimum drawdowns for many superannuation pensions.
Normally, people with account-based pensions who are under age 65 have to draw at least 4% of their pension balance as a pension payment each year, with the percentage increasing with age.
Under the changes announced over the weekend, the minimum drawdowns will be halved for the 2019/20 and 2020/21 for “account-based annuities and pensions, allocated annuities and pensions, and market linked annuities and pensions”, according to the material supporting the Bill.
People potentially impacted by this change should seek professional advice about their situation.
The SMSF Association, which has been calling for a reduction in the drawdown rates, has endorsed the Government’s changes, saying the drawdown change gives “SMSF trustees the discretion and flexibility to better manage their superannuation assets in these testing times”.
Expanded early access to superannuation
The Government also announced that it would be expanding the early access to superannuation rules, allowing people “affected by the adverse economic effects of Coronavirus” to withdraw more of their superannuation.
Under the proposed changes, people who are eligible will be able to apply to withdraw up to $10,000 of their superannuation before 1 July 2020 and a further $10,000 from 1 July 2020 (with some time limits to be set in the legislation).
Details on the proposed eligibility are set out in the Government fact sheet.
“While superannuation helps people save for retirement, the Government recognises that for those significantly financially affected by the Coronavirus, accessing some of their superannuation today may outweigh the benefits of maintaining those savings until retirement,” says the fact sheet.
“People accessing their superannuation will not need to pay tax on amounts released and the money they withdraw will not affect Centrelink or Veterans’ Affairs payments.”
Labor has concerns about this measure, and is likely to propose amendments, but it is expected that the stimulus Bills will pass the Parliament, with or without amendment, either today or tomorrow.
Labor Shadow Treasurer Jim Chalmers said the changes to early release of super “risk undermining retirement incomes and compromising financial system stability, and should only be a last resort”.
Speaking on ABC’s Insiders, Chalmers said: “We also think that there are real issues with encouraging people to divest from super when the market’s in the condition that it is now. It’s not good for them, it’s not good for the system more broadly and we don’t want to create problems for people’s retirement down the track.”
Speaking to ABC RN Breakfast, Labor Leader Anthony Albanese said: “It clearly isn’t in the interest of individuals superannuants to essentially sell out at the bottom of the market. That would have a negative impact on their retirement incomes, and it would also, of course, have a negative impact, potentially, on superannuation – if super funds have to sell their assets, once again, at the bottom of the market that would not be a good thing.”
Superannuation funds say they are ready to implement the measures, but also warn people about withdrawing their super.
The Australian Institute of Superannuation Trustees (AIST) has urged Australians experiencing financial hardship to “access all other sources of income measures before tapping into their super”.
“AIST is acutely aware of the significant upcoming need for a large number of members of our funds to be provided with income support due to the impacts COVID 19 on their income. We stand ready to support the Government and our member funds in assisting impacted Australians at this time.”
“We are also aware that to ensure good long-term outcomes for all Australians as well as the wider economy, accessing superannuation should be done as a last resort, and the mechanism by which members’ savings are accessed should avoid locking in current losses for members, and be administratively tenable.”
Treasurer Josh Frydenberg says it is estimated that up to $27 billion will be withdrawn from super under this measure. “This comprises less than 1 per cent of the 3 trillion dollars in superannuation today. APRA, the prudential regulator, has advised the government that they do not expect this initiative to have a significant impact on the industry overall.”
Frydenberg later noted that super funds “last year had about $300 billion in cash. So the superannuation funds have the ability to provide what Treasury estimate to be about a $27 billion injection into the economy. What we’re talking about is less than 1 per cent of the funds that are currently under management in superannuation. This is the people’s money and this is the time they need it most”.
Industry Super Australia said it is “ready to work through the all important detail that will enable people suffering hardship access to some of their super in an efficient way that doesn’t undermine our national savings system”.
“As we have been indicating publicly, this is an issue that must be handled very carefully in order to prevent the compounding of liquidity pressures that may be faced by superannuation funds in the current market conditions, and as they support anxious members.”
Industry Super Australia says industry super funds weren’t consulted on the proposal, but “stand ready to engage with government and the ATO to make it work”.
Pension deeming rates
The Government also announced that it would further reduce the age pension deeming rates. Seniors groups had called on the Government to move the deeming rates automatically in line with RBA rate changes, but the Government instead has gone with ad-hoc reductions to the deeming rates. With the RBA cutting the cash rate to 0.25%, the Government has announced a 0.25% cut to the deeming rate – on top of the 0.5% cut announced on 12 March 2020. This will make the lower deeming rate 0.25% and the upper deeming rate 2.25%. These cuts will be effective from 1 May 2020.
“The reductions reflect the low interest rate environment and its impact on the income from savings. The change will benefit around 900,000 income support recipients, including around 565,000 people on the Age Pension who will, on average, receive around $105 more from the Age Pension in the first full year that the reduced rates apply,” says the Government fact sheet on the change.
Budget pushed back to October
The Government also said the 2020/21 Federal Budget has been pushed back to 6 October 2020. It was to be released in May.
“Forecasting for Budgets is difficult at the best of times, let alone when we’re in the midst of a global pandemic. And I understand the states are making similar arrangements and it’s important that we are able to deliver a Budget at a time where there is more certainty about the economic environment and that is planned for the first Tuesday in October,” said Treasurer Frydenberg.
More to come.