The government’s announcements on 22 March help provide support for some people impacted by the economic effect of the Coronavirus. Three of the announcements which are now law, apply to anyone with super or in receipt of social security benefits.

Let’s look at what the government has to say and how the changes work.

In a nutshell the changes are:

• Reduction in the minimum pension for market-linked and account-based pensions, including transition to retirement income streams, for the 2019/20 and 2020/21 financial years;
• Early access to super benefits of up to $10,000 in the 2019/20 and for the first three months of the 2020/21 financial years, and;
• Reduction in social security deeming rates with the lower deeming rate reduced to .25% and the upper deeming rate to 2.25% from 1 May 2020.

Reduction in the minimum pension

The minimum pension for account-based pensions and market linked income streams are reduced by 50% for the 2019/20 and 2020/21 financial years. The reduction is aimed at limiting the need to sell investments if the higher default rate of minimum pension had remained.

The reduced rates are:

If you have already withdrawn more than the new reduced minimum pension rate for the 2019/20 income year, there’s no further requirement to make any further withdrawals for the balance of this financial year. But you won’t be able to repay any amount that is over the revised minimum. If you do, the amount repaid will be treated as a contribution and you will need to meet the requirements for making concessional or non-concessional contributions. If you don’t meet the contribution requirements, the trustee is obliged to return it to you within 30 days.

There is no change to the maximum pension you can withdraw. For account-based pensions you don’t have a limit to the amount you can withdraw from your pension account. For transition to retirement pensions the maximum is set at 10% of the opening account balance on 1 July in the financial year. If the pension is a market linked pension, the maximum varies between 45% and 110% of the calculated standard annual pension level.

If you are in receipt of a complying lifetime or life expectancy or flexi pension there is no reduction in the amount you are required to withdraw annually as determined by an actuary and set by the pension’s terms and conditions. Due to the recent high levels of volatility in the equity markets complying pensions may face solvency issues but whether that impacts on pensions can only be determined at the time of the actuarial valuation of the fund.

For access to the government’s factsheet on reductions in the pension minimums, click here.

Case study

Marika is 66-year-old drawing an account-based pension. On 1 July 2019 the account balance of the pension was $200,000 which meant that the minimum pension to be drawn for the 2019/20 financial year was equal to 5% of the balance. This meant that Marika would need to draw at least $10,000 from the fund as her minimum pension.

However, with the 50% temporary reduction in the minimum pension Marika is now required to draw down 2.5% which is $5,000 of the opening pension balance on 1 July 2019. If Marika has already withdrawn more than $5,000 this financial year, she cannot repay any excess above $5,000 back except as a contribution providing it meets the contribution rules.

Early access to super benefits

If you are impacted because of the economic effects of the Coronavirus you can access up to $10,000 in each of the 2019/20 and 2020/21 financial years if you qualify. From 1 July 2020 you will be able to access the further $10,000 if you apply up to approximately 30 September 2020, but the final date can only be determined once the legislation has made it through parliament.

To qualify for early access, which can be made from mid-April, you’ll need to satisfy one or more of the following:

• You are unemployed; or
• You are eligible to receive a job seeker payment, youth allowance for jobseekers, parenting payment (which includes the single and partnered payments), special benefit or farm household allowance; or
• On or after 1 January 2020:
  • You were made redundant; or
  • Your working hours were reduced by 20 per cent or more; or
  • If you are a sole trader – your business was suspended or there was a reduction in your turnover of 20 per cent or more.

You can apply to withdraw less than the maximum withdrawal amount of $10,000, but you will only be able to make one application in each financial year. This means that if you apply for less than $10,000 and require more, you can’t make a second application to get an extra amount. So think about the amount you really need an apply for that. Applications for early access can be made from mid-April via your myGov account. So if you don’t have a myGov account maybe now is the time to get one if you want early release of your super.

The ATO will receive your application and determine whether you are eligible for an early release. If you are a member of an APRA fund your super fund will be notified and it will make the payment to you. It would be good to check with your fund and make sure they have your details right so there is no holdup in the payment of your benefit. If you are a member of an SMSF the ATO will send you the release approval as it is your responsibility to pass it on to your fund before any payment can be made.

The early release amount you receive from your fund will be tax free and will not impact on any Centrelink or Veterans’ Affairs payments. This early access to super because of the Coronavirus pandemic is separate from any other release of super for special reasons. It does not replace any of the other current early access rules if you are experiencing financial hardship or for compassionate reasons.

If you are after further information on this new early release condition there is a government factsheet available if you click here.

Case study

Eamon works at O’Farrelly’s Bar and Grill in Melbourne but because of the Coronavirus his work hours reduced to an average of about 20 hours making take away meals and drinks. He previously worked between 40 and 60 hours on average. As his work hours have reduced by more than 20% of the average hours over the last 6 months, he decides to apply for $8,000 as an early release of his super. This is what he estimates will pay his rent and other living expenses.

If Eamon applies for $8,000, he won’t be able to make a second application this financial year to increase the amount to be released from his super fund. He then self-certifies on myGov that he is eligible for early release. As Eamon is a member of an industry fund which is an APRA fund, if the ATO approves the release it will write to the fund as well as Eamon. The industry fund will release the amount and pay it to Eamon’s bank account.

In July 2020 Eamon is still finding things difficult as his working hours have not increased. He makes a second application for release of $10,000 which is approved by the ATO. The ATO notified Eamon’s super fund and Eamon of the release and the fund pays it into his bank account.

The two amounts received by Eamon are not taxable nor will they impact on any Centrelink benefits to which he becomes entitled. He is free to spend the money as he wishes, and he may even wish to recontribute any unused amounts back to super if he qualifies within his contribution caps.

Case study

Joanna is a sole trader who runs a gym which has been required to close due to the Coronavirus. In August 2020 she applies for an early release of $10,000 from her super on the basis that the turnover has decreased from a monthly average of $15,000 to $4,000. This is a drop of more than 20% of her monthly average turnover over the last 6 months of 2019.

Joanna self-certifies that she is eligible for early release and applies to have the amount released from her self-managed superannuation fund. If the release is approved by the ATO Joanna will receive an authorisation which she, as trustee of the fund, will arrange for the payment of the amount to her.

Reduced social security deeming rates

The upper and lower social security deeming rates will be reduced from 1 July 2020 to 0.25 percent up to the threshold and 2.25 percent above the threshold. This reduction is in addition to the 0.5 percent reduction to the lower rates announced on 12 March 2020.

For access to the government’s factsheet on the changes to social security deeming rates, click here.

Case study

Harry is in receipt of a single part-rate age pension with $200,000 in financial assets and $175,000 in a term deposit with an interest rate of 1.5% p.a. Under the previous deeming rates Harry’s age pension would have been reduced by $8.50 p.f. as her income was above the income test threshold. In view of the reduction in deeming rates he will be entitled to the maximum rate of age pension.

Case study

Lara and Gordon are an age pension couple who have $550,000 in financial assets. They have $300,000 in super which earned 5% last year. They also have $130,000 in a term deposit which has an interest rate of 1.5% with the remainder in cash.

Under the precious deeming rates Lara and Gordon’s age pension would have been reduced by $65 each per fortnight. Under the deeming rates applying from 1 May 2020 each of their pensions will be reduced by $32 per fortnight.

Summing up

These changes to super and social security are a step in the right direction to provide relief to those experiencing difficulties in the current difficult conditions. Whether any further concessions are made by the government remains to be seen. Hopefully, it won’t be necessary.