The treasury department recently conducted a consultation process into options to improve the regulation of retirement income streams, called the Review of Retirement Income Stream Regulation. This is a submission to that review, covering the regulation of account-based income streams and how they relate to SMSFs.
Submission: Review of retirement income stream regulation
Thank you for the opportunity to make a submission in regards to the regulation of retirement income streams. This submission is focused on the minimum drawdown requirements of account-based pensions, particularly questions twelve through sixteen of the discussion paper and the implications for SMSFs.
Firstly I would point out that, to an extent, account-based pensions already have a built-in automatic response to changes in asset prices. This occurs by adjusting the minimum drawdown levels based on the account balance at the start of the financial year, or the start of the pension. However there still may be an issue where there are sudden and large decreases in asset values.
In terms of automatic changes to the pension drawdown levels there is a significant question as to what this would be based upon. Such a mechanism would require balancing cost and complexity with the need to be a relevant measure of the changes in asset values experienced by super funds. It is likely that such an automatic mechanism would not match the actual changes experienced by super funds, due to different investment strategies. A better solution would be one which leaves the fund trustees and members able to react based on individual circumstances.
I would also draw attention to the tax consequences of not meeting the minimum drawdown requirements, as set out in the ATO Taxation Ruling 2013/5 Income tax: when superannuation income stream commences and ceases. According to the ruling if the minimum drawdown is not made, and the exemption does not apply, the pension is deemed to have ceased as at the start of the income year. This would have tax consequences both for the fund – which will no longer be able to claim the tax concession for being in pension phase, and the member – who would have the amounts withdrawn taxed as lump-sums instead of pension payments. Additionally, if the underpayment relates to a transition-to-retirement pension, as the member would be subject to the cashing restrictions, there may be SIS Act/regulation compliance issues.
I recommend that a policy of automatic or discretionary changes in the pension drawdown requirements should consider the implications for super fund members who may, inadvertently, not meet the changing requirements and face tax and compliance implications as a result.
It is important as part of the superannuation system that people are able to plan, long-term, for their retirement. Constantly changing pension draw-down limits would make retirement planning more difficult, and damage confidence in the superannuation system.
Rather than automatic or discretionary adjustments an alternative would be to simply lower the minimum pension drawdown levels. For example, lowering the minimum of 4% to 3%, with the other rates changing accordingly. This would allow greater flexibility in pension payments to respond to changes in asset values, while also providing certainty and allowing for long-term retirement planning. Super funds which experience significant investment losses, at times other than widespread events like the GFC, would be able to respond to member requests to reduce pension payments to rebuild savings.
Considerations of the impact on government revenue of such policies should not only be weighed against the current budgetary situation, but the long-term costs of greater provision of the age pension to retirees who have depleted their superannuation.