- 1. You must have reached preservation age.
- 2. Tax breaks on TRIPs can be compelling.
- 3. You must withdraw no more than 10% of your TRIP account balance.
- 4. You must withdraw a minimum amount each year from your TRIP.
- 5. You cannot withdraw lump sums from your TRIP (except in one instance).
- 6. A popular TRIP strategy.
- 7. Not all super funds offer TRIPs.
- 8. Ensure your fund’s trust deed permits TRIPs.
- 9. Running a TRIP and contributing to a SMSF may require segregation.
- 10. A TRIP is not necessary if you can already access your super.
Note: The general concessional contributions cap remains at $30,000 (for the 2015/2016 year, and also applies for the 2014/2015 year). The special $35,000 cap for over-50s continues to apply for the 2015/2016 year (or more specifically, to anyone who is aged 49 years or over on 30 June 2015). If you’re considering a transition-to-retirement pension, while continuing to make super contributions, then seek taxation advice on the merits of such a strategy for your personal circumstances. I explain this strategy in Fact 6 of the article below.
I have often described transition-to-retirement pensions (TRIPs) as the super saver’s version of ‘having your cake and eating it’.
A transition-to-retirement pension enables Australians who have reached their preservation age (at least the age 55 and increasing to age 56 and older, depending on date of birth) to access their super in the form of a pension without retiring or satisfying an additional condition of release.
TRIPs were originally introduced in July 2005 to help Australians who wanted to transition to retirement via part-time work. By starting a TRIP, you don’t have to retire to withdraw your super benefits. You can work part-time or full-time or even casually.
Although some individuals use TRIPs for a gradual transition into retirement, the majority of TRIPpers appear to have used the strategy for boosting super savings and tax minimisation. The key message many advisers may use when recommending a TRIP is: most Australians who have reached preservation age (at least 55 and increasing to age 56 from 1 July 2015) can boost super savings while cutting their tax bill, depending on an individual’s level of income and marginal tax rate.
One of the more popular TRIP strategies is to salary sacrifice into your super fund up to your concessional (before-tax) contributions cap, and replace that income with tax-free (if over 60) pension payments, or concessionally taxed pension payments (if under 60). The right combination of salary and super will depend on your salary level, your age, your tax position, the size of your super benefit and your income needs (see Fact 6 below for an example of how this strategy works).
Note however, that since the over-50s concessional contributions cap has been reduced over time (it was $100,000 in 2009), the right balance of salary sacrifice contributions and pension payments may need to be revisited. Currently, the over-50s concessional cap is $35,000 for anyone aged 49 years or over on 30 June 2014 (for the 2014/2015 year), and $35,000 for anyone aged 49 years or over on 30 June 2015 (for the 2014/2015 year),
Want to know more? Check out the following 10 interesting facts and figures about TRIPs.
1. You must have reached preservation age.
If you have reached your preservation age (that is, the minimum age that you can access your super — at least 55 years of age, and increasing to 56 years from 1 July 2015), you can start a transition-to-retirement pension (TRIP) and continue to work, and continue making super contributions. If you were born before 1 July 1960, your preservation age is 55, that is you turn 55 before 1 July 2015. If you were born after June 1964, then your preservation age is 60 (see table below).
|Date of birth||Preservation age|
|Before 1 July 1960||55|
|1 July 1960 – 30 June 1961||56|
|1 July 1961 – 30 June 1962||57|
|1 July 1962 – 30 June 1963||58|
|1 July 1963 – 30 June 1964||59|
|After 30 June 1964||60|
Source: Adapted from the Superannuation Industry (Supervision) Regulations 1994, Regulation 6.01
2. Tax breaks on TRIPs can be compelling.
Any earnings on assets financing your transition-to-retirement pension (TRIP) are exempt from earning tax. When you receive pension payments from a TRIP and you’re over 60, your pension payments will also be tax-free. If you’re under the age of 60, the taxable component of pension income is taxed but you gain access to a pension tax offset of 15%. The tax-free component of the pension will be tax-free, even when under the age of 60.
3. You must withdraw no more than 10% of your TRIP account balance.
You can withdraw no more than 10% of your account balance each year. For example, if the account balance of your TRIP is $500,000 on 1 July, then you can withdraw no more than $50,000 for the financial year. If your TRIP’s account balance is $200,000, then you can withdraw no more than $20,000.
4. You must withdraw a minimum amount each year from your TRIP.
You must also ensure that you withdraw a minimum payment from an account-based TRIP, which usually means you must withdraw at least 4% of the assets financing the pension each year. For an individual aged from 55 to 64, the minimum payment for a TRIP for the 2014/2015 year, and for the 2015/2016 year, is 4% of the account balance as at 1 July 2014 (and for the 2015/2016 year, as at 1 July 2015) (see table below). Temporary, lower, percentage factors were available in earlier years to allow account balances to recover from the Global Financial Crisis, but the percentage factors have now reverted to normal.
|Minimum annual pension (income stream) payments|
|Regular Percentage factors||Temporary relief was available in earlier years|
|2013/2014 and future years||2012/2013 & 2011/2012 years (75%)||2008/2009, 2009/2010 & 2010/2011 years (50%)|
|95 or older||14%||10.5%||7%|
Note: Amount calculated on 1 July each year, unless first year of account-based income stream, and then pro-rated from commencement day. Minimum amount to be rounded to nearest $10.
Source: Adapted from Schedule 7, Superannuation Industry (Supervision) Regulations 1994 and Federal Government news release dated 18 February 2009, and 12 May 2009, and 30 June 2010, and 29 November 2011. Figures for 2011/2012 year and 2012/2013 year calculated by Trish Power.
5. You cannot withdraw lump sums from your TRIP (except in one instance).
A TRIP is like any other account-based income stream, with two major exceptions: you can only withdraw a maximum of 10% from a TRIP (refer to Fact 3), and in nearly all cases, you cannot withdraw lump sums until you retire, or until you satisfy another condition of release such as reaching the age of 65.
Note: Generally speaking, you cannot convert your TRIP to a lump sum; that is, a TRIP is a non-commutable income stream in most instances. The one exception to the non-commutable rule is when the fund member has unrestricted non-preserved benefits in the TRIP account. You may have this type of benefits if you were a fund member before July 1999. If so, this category of benefits are not preserved and can be accessed as a lump sum without breaking the TRIP rules. The lump sum counts towards the minimum pension payment amount required to be paid each year (see Fact 4), but does not count towards the 10% maximum payment limit (see Fact 3).
In all other cases, you may be able to commute your TRIP into a lump sum when you retire, or turn 65, or satisfy some other condition of release, depending on the type of income stream you have chosen as your TRIP.
6. A popular TRIP strategy.
A popular TRIP strategy is to salary-sacrifice up to your annual concessional contributions cap (see below for latest caps), and then receive pension income from a TRIP. This strategy can offer the following advantages:
- salary sacrificing reduces a person’s taxable income while the sacrificed contributions reside in a concessionally taxed environment.
- earnings on pension assets are tax-free within the fund, and the earnings on contributions will be subject to up to 15% tax compared to a person’s marginal rate of tax on income outside the fund. (Note that if your adjusted taxable income is higher than $300,000, your concessional super contributions will be hit with an additional 15% tax, taking total tax on super contributions to 30%.)
- pension income paid from a TRIP to a fund member is tax-free for over-60s, which means tax is payable only on the reduced taxable income from a person’s salary. (For under-60s, pension income still forms part of an individual’s assessable income and the individual is eligible for a 15% pension offset/rebate.)
Note: The annual general concessional contributions cap is $30,000 for the 2015/2016 year (and for the 2014/2015 year). The special concessional cap of $35,000 applies to anyone aged 49 years or over on 30 June 2015 (for the 2015/2016 year), and to anyone aged 49 years or over on 30 June 2014 (for the 2014/2015 year).
For example: Joan is 62 and earns $90,000 a year plus super. If she does nothing, her income tax bill will be $21,247 plus 2% Medicare levy of $1800, taking the total tax take to $23,047 (for the 2015/2016 year). Joan would have paid the same amount of tax for the 2014/2015 year as well. She decides to commence a typical TRIP strategy. She salary sacrifices $26,000 into super (her annual concessional cap is $35,000 and her employer contributes $8,550 in Superannuation Guarantee payments). She then receives pension income from her TRIP, which is tax-free so the pension income doesn’t form part of her taxable income. Her taxable income is reduced to $64,000 and Joan’s pension income is tax-free. Joan’s income tax bill is now $13,627 ($12,347 income tax plus $1,280 Medicare levy) rather than $23,047 ($21,247 income tax plus $1800 Medicare Levy), although her additional super contributions are subject to 15% contributions tax of $3,900. In summary, Joan has saved at least $5,520 in total taxes (while boosting her super account by $22,100, after contributions tax is deducted). Potentially, if Joan runs a self-managed super fund, she can offset the 15% contributions tax by receiving franked dividends from Australian shares.
7. Not all super funds offer TRIPs.
Not all super funds offer transition-to-retirement pensions. You will need to check with your current super fund whether they offer this pension option.
8. Ensure your fund’s trust deed permits TRIPs.
If you run your own super fund (SMSF), and you want to start a TRIP, you need to ensure that your fund’s trust deed permits such income streams.
9. Running a TRIP and contributing to a SMSF may require segregation.
If an individual runs his or her own SMSF and chooses to salary sacrifice while taking a TRIP, then the SMSF trustees must either segregate the fund’s assets that finance the TRIP, or obtain an actuarial certificate. If a fund does not segregate pension assets from assets representing accumulation phase, then the SMSF trustees must then obtain an actuarial certificate each year to identify the tax-exempt income derived from pension assets.
10. A TRIP is not necessary if you can already access your super.
If you can already access your super benefits then you don’t need a TRIP. You can start a regular retirement income stream or take your benefit as a lump sum without having to go through the process and cost of a TRIP. For example, if you’re aged 65 or over, then you don’t need a TRIP. If you’re over the age of 65 and you’re eligible to contribute to super (you satisfy the work test), then you can also take advantage of strategies to cut your income tax bill by making before-tax contributions while also receiving an income stream.