If you are on the final stretch to retirement pensions and would love to start winding back your working hours but you do not think you can afford it, read further.
Also, for those who plan to keep working full time for a while longer and want to boost your super but have not got the ready cash to make extra contributions.
Help could be at hand in both cases in the form of a transition-to-retirement pension or income stream (TTR). This strategy can be used to either:
- Work fewer hours and use a TTR pension to supplement your income.
- Salary sacrifice some of your salary into super to save tax and use a TTR pension to replace some or all the lost income, even if you continue working full time.
Am I Eligible?
If you have reached your preservation age and still working, you are good to go. Your preservation age will be between 55 and 60, depending on your date of birth.
You must also be a member of an accumulation fund, not a defined benefit fund. Generally, only about 10% of Australians are members of defined benefit funds and tend to be members of public sector or older corporate funds.
What Are the Advantages?
The taxation of TTR pensions has always been one of their key attractions. They are still tax-effective for many people, although they lost a little of their shine after a change to the tax rules in 2017.
Even so, depending on your personal circumstances TTR pensions still have much to offer. They can help you:
- Ease into retirement pensions by reducing your working hours without cutting your income or compromising your lifestyle.
- Continue to make contributions to your super accumulation account (or have them made by your employer).
- Receive tax-free pension payments (but only if you are aged over 60).
- Grow your super and save tax via salary sacrifice or voluntary contribution, even if you continue working full time.
When a member salary sacrifices or make a voluntary concessional contribution into super, your contributions are taxed at the concessional rate of 15% up to an annual cap of $25,000. This can be a valuable strategy for those aged over 60, on a marginal tax rate higher than 15%, and a super balance that could do with a boost.
What Are the Disadvantages?
The financial benefits of a TTR strategy may be marginal before you turn 60 depending on your personal tax bracket so here are some things to keep in mind.
- If you are aged between 55-59, the taxable portion of your TTR pension payments is taxed at your marginal rate less a 15% tax offset.
- The more of the super funds you withdraw during your TTR phase, the less money you will have available when you do retire.
- If you or your partner currently receive any Centrelink payments, a TTR pension may affect your entitlements.
- Your fund may require you to leave a minimum amount in your accumulation account to maintain your insurance cover.
- The tax savings (and super boost) of salary sacrifice or voluntary contributions into super may not be worthwhile for low- and high-income earners, as illustrated below.
For a low-income earner on a marginal income tax rate of 19% or less, the tax savings of a TTR strategy will be negligible.
Take the example of Jim, who earns $35,000 and can afford to salary sacrifice $5,000 a year into super. He would only save 4% tax by doing this (the difference between his marginal rate of 19% and the 15% super tax rate), or $200. He may be better off combining salary sacrifice (without a TTR strategy) with an after-tax super contribution of $1,000, for which he would receive the maximum government co-contribution of $500.
For high-income earners, there may be limited scope to make additional concessional contributions.
Take the example of Sam, who earns $180,000 and receives Super Guarantee payments of $17,100 a year, just $7,900 shore of the $25,000 cap. He has enough ready cash to make a tax-deductible contribution of $7,900 a year without having to bother with a TTR pension.
How to Start?
You start a Transition to retirement pension by transferring some of your super from your accumulation account into a pension account. Most super funds offer a pension account, but if your fund does not you can start a TTR pension with another fund.
The transferred funds do not count towards your transfer balance cap because you are still working and therefore not in the retirement pensions phase. But the funds in your TTR pension account will count towards your transfer balance cap once you do retire. This cap is currently $1.6 million.
You must leave at least a small balance in your accumulation account so that it remains open to receive your employer’s compulsory 9.5% super guarantee contributions or any voluntary contributions you may want to make.
Investment earnings in both your accumulation and pension accounts are taxed at 15%.
You must withdraw a minimum of 2% of your pension account balance each year (if you are aged under 65) and a maximum of 10%. At least one withdrawal must be made each year.
Once you are over 65 there are different minimum pension payments rates.
If you are aged 65 and over, there are no restrictions on the amount of super you can withdraw even if you are still working. Rather than set up a TTR pension you can start a normal super pension which has added benefits.
How Do I Stop a TTR Pension?
A TTR pension automatically converts to an account-based pension when you meet a superannuation condition of release, such as retiring or reaching age 65.
When your TTR pension becomes an account-based pension, you will be entitled to tax-free investment earnings and no upper limit to withdrawals.
You can also transfer your pension account funds back into your accumulation account at any time. If you are under 65, you must have made the minimum 4% withdrawal in the financial year you stop your TTR pension.
Can I Start a TTR From My SMSF?
The short answer is yes, provided this is allowed in your SMSF’s trust deed.
If you are a trustee and want to start a TTR for yourself or another member of your fund, you should get independent professional advice. The rules are complex and not complying can be costly.
Before you set up a TTR pension, it is important to establish the mix of assets you (or your fund members) have in your SMSF. This could include a mix of:
- Unrestricted non-preserved benefits (which can be accessed without meeting a superannuation condition of release)
- Restricted non-preserved benefits
- Preserved benefits.
All three of these asset categories can be transferred to support a TTR pension, but they must be chosen in the order outlined above. The tax-free and taxable components of any assets used must also be identified so that appropriate tax payments can be made.
It is important to understand that if assets supporting a TTR pension have both taxable and non-taxable components, you (or your fellow member) cannot choose to apply one or the other to the pension. The components must be applied proportionally.
For example, if an asset supporting the TTR pension has a taxable component of 70% and a tax-free component of 30%, these proportions must be applied for tax calculation purposes when the asset is transferred to the pension.
What Else Do SMSFs Need to Know?
Record-keeping is crucial if you are paying a TTR pension from your SMSF. You need to keep records that show:
- The value of the Transition to retirement pensions account when it commences, on July 1 each year, and when it enters the retirement phase.
- All TTR pension payments made (and how they were made).
- The adjusted values of the assets supporting the TTR pension after payments have been made.
- The date you (or your fellow fund member) retire. This is when your TTR pension enters the retirement phase and is subject to ‘normal’ account-based pension treatment.
- The share of your fund’s earnings that are allocated to the TTR pension (and therefore taxable at 15%).
In addition, it is important to ensure that:
- Any fund contributions you (or a fund member) receive from your employer are kept separate from the super benefit supporting the Transition to retirement pensions.
- Pay the minimum 4% annual TTR pension amount and do not exceed the 10% maximum.
- You pay 15% tax on earnings from the assets supporting the TTR pension. You (or the member receiving the pension) will be entitled to offset this amount in your tax return.
Failure to do any of these things can mean your fund becomes non-compliant, and you know what that means. The Australian Taxation Office can impose a range of penalties on SMSF trustees for non-compliance.
R T Accounting & Taxation Services Are Here to Help
Transition to retirement pensions have real benefits for some people but maybe less attractive for others. Deciding whether a TTR strategy is appropriate for you is an important decision and will depend on your personal financial circumstances and goals.
Please do not hesitate to get in touch with the SMSF specialists at R T Accounting & Taxation Services for a guide on how TRIS & TTR work specifically for you as all cases are different.