Many people think one must be retired in order to receive a pension/ income stream from a superannuation fund. This is not the case. 

An individual who has reached the preservation age but not yet satisfied a condition of release, ie permanent retirement or an age condition of release (age 65),  still has the ability to take advantage of the generous tax concessions that funds in pension mode enjoy. 

Further, there are tax benefits available to the individual as well as the SMSF.

What is a Transition to Retirement Income Stream (TRIS)?

The TRIS is a form of the traditional Account Based Pension (ABP) and is designed to assist those people who are still employed.  It provides an opportunity for individuals to reduce their hours worked and restructure their superannuation as retirement approaches.  The TRIS shares many of the characteristics of the ABP as follows;

  • Requirement to draw down a minimum amount at least annually in accordance with the same percentages which apply to the traditional account based pension.
  • No requirement to change the investments resulting from the establishment of the income stream
  • Any income or capital gains generated by the assets which are funding the pension will not be subject to tax in the fund.
  • If you are over the age of 60 you will receive the pension draw down tax free.
  • Paperwork is required to establish the pension 
  • Once the pension commences you cannot add to the pension via rollover or contributions unless a stop and restart of the pension occurs.
  • No residual capital value.

There are two noteworthy differences between the TRIS and the ABP which are as follows;

  • Upper limit applying to the amount which can be withdrawn from the TRIS each financial year.  This amount is 10% of the balance in the TRIS and is assessed and set on 1 July each financial year.
  • Unlike a full ABP it is not possible to commute any lump sums withdrawn.

Once a condition of release is achieved through either permanent retirement or reaching the age of 65 the TRIS can be converted to a full ABP and the maximum of 10% will no longer apply. Access to a commuted lump sum will then be accessible.

What are the potential benefits of a TRIS?

Additional Income

The ability to receive a TRIS from the fund can represent additional income to be used to support living expenses or allow an individual to reduce the number of hours they work but not be any worse off from a disposable income perspective.

Personal Tax Savings

Income Stream payments are taxed in a more favourable manner than an individual’s salary. Normal salary and wages are taxed at marginal rates where as income stream payments if an individual is over the age of 60 are 100% tax free.  If a person is aged between 55 and 59 then the taxable portion of the income stream payment is subject to tax at marginal rates but also carries a 15% tax offset which reduces the amount of tax payable at a marginal level.  The tax free portion of the income stream is not subject to tax and as such does not get included in an individuals personal taxation return.

The above can provide an opportunity for an individual to salary sacrifice more into super and replace the lost income with the income stream they must withdraw. On a personal level there is potentially a tax savings due to the individual’s taxable income being lower.

Increase in Retirement Savings

As an income stream is concessionally taxed as described above this implies that there may be potential for an individual to salary sacrifice more into super than what is being withdrawn without them being any worse off.  This may represent a good retirement savings strategy for some people.

If an individual is salary sacrificing into superannuation care should be taken to not exceed the concessional contribution cap which for the 2013/14 financial year for under 60’s is $25,000 and for 60 and over is $35,000.  This amount takes into account the mandatory 9.25% Super Guarantee so when determining the amount to salary sacrifice this amount should be taken off of the contribution cap first.  If an individual exceeds their cap then excess contribution tax will apply which can be quite hefty in certain circumstances.

Tax Free Environment for assets supporting a pension account

When a member of a fund is in “accumulation mode” the income and capital gains that the assets generate will be subject to tax of up to 15%.  Where as the income generated by assets which are supporting an income stream will not be subject to tax.  This in turn will allow a higher return on investment to occur and as such will mean more superannuation to retire with.

In summary

Whilst a TRIS has many tax benefits both internally and externally to super this does not automatically mean that it is the right course of action for everyone.  There are many factors that influence whether there will be an overall benefit received which includes  the amount in superannuation, what the level of assets are external to super, the indivdual’s marginal tax rate, the split between the taxable and tax free components of a superannuation balance and whether there are any centrelink benefits being received.

In making the decision to transition it is important to think of all the above aspects and discuss these with a financial adviser if there is any uncertainty before moving down this path.