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2 must-know financial measures to assist retirees during COVID-19

We highlight two important measures introduced by the Australian Government to provide financial assistance to retirees during this difficult time.

Retirees have been impacted by COVID-19 in many ways. For many, stricter isolation measures have been required as a result of being in a higher-risk category for the illness. “Community Hours” for seniors were introduced at Coles and Woolworths supermarkets to help combat panic-buying. And of course, travel – so popular with many retirees – has ceased for the time being.

But, as ever, it’s the financial impacts of COVID-19 that often top the list of retiree concerns. With this in mind, this article highlights two measures introduced by the Australian Government to provide financial assistance to retirees during this difficult time.

These include a temporary reduction of superannuation minimum drawdown rates and a reduction in social security deeming rates.

1. Temporary reduction in superannuation minimum drawdown rates

The Australian Government is temporarily reducing superannuation minimum drawdown requirements for account-based pensions and similar products by 50% for the 2019-20 and 2020-21 income years.

This is because many retirees have lost a significant portion of their super account balance as share markets plunged due to COVID-19.

Essentially, the new rules help retirees who would prefer not to sell their investment assets while the value of those assets is reduced.

Default minimum drawdown rates increase with age brackets and are as follows:

  • Under 65 – 4%
  • 65-74 – 5%
  • 75-79 – 6%
  • 80-84 – 7%
  • 85-89 – 9%
  • 90-94 – 11%
  • 95 or more – 14%

However, with the new measures being introduced, these rates will halve to:

  • Under 65 – 2%
  • 65-74 – 2.5%
  • 75-79 – 3%
  • 80-84 – 3.5%
  • 85-89 – 4.5%
  • 90-94 – 5.5%
  • 95 or more – 7%

So say, for example, you’re a 70-year-old retiree with a $200,000 pension. Previously, you would have been required to draw down 5% of your account balance over the course of the 2019-20 and 2020-21 financial years. That means you would have had to draw down $10,000 by 30 June 2020 to comply with the minimum requirements.

However, with the new measures being introduced, you would only have to draw down 2.5% of your account balance – ie. $5,000 – by 30 June 2020.

In this way, you can preserve your capital while still drawing income from your superannuation.

Obviously, needs will vary from person to person. If your account balance is low, you may find you need to withdraw more than the minimum amount to cover your living expenses.

As always, consult your financial advisor for advice tailored to your situation.

Reducing social security deeming rates

On 12 March, the Australian Government announced an 0.5 percentage point reduction in both the upper and lower social security deeming rates. As of 1 May 2020, the Government reduced these rates by another 0.25 percentage points.

That means as of 1 May 2020, the upper deeming rate will be 2.25 per cent and the lower deeming rate will be 0.25 per cent.

The deeming rate is the amount the government deems your income to be from your financial assets. It assumes these assets earn a set rate of income, no matter what they really earn, and makes a calculation as such.

This calculation is used for the pension income assessment and can affect how much income someone receives through their pension.

The reduction in deeming rates reflects the current low interest rate environment and its impact on the income from savings. The changes will benefit around 900,000 income support recipients, including around 565,000 people on the Age Pension who will, on average, receive around $324 more from the Age Pension in the first full year that the reduced rates apply.

Once again, this is general advice only and it’s best to consult your financial advisor to find out if and how the reduction in social security deeming rates affects you.