A transition-to-retirement pension (TRIP) enables any Australian, aged 55 or over, to access his or her superannuation benefits in the form of a pension (income stream) without retiring or satisfying an additional condition of release. Using three case studies, this article illustrates how a TRIP can operate in practice.
The basic feature of a TRIP is that you don’t have to retire to withdraw your super benefits. You can work part-time or full-time or even casually. TRIPs are subject to five main conditions:
- You must have reached your preservation age: anyone born before 1 July 1960 has a preservation age of 55 years.
- You can withdraw no more than 10% of the value of your pension account balance each financial year
- You must withdraw, each year, a minimum of 4% of the value of your pension account balance, as at 1 July.
- You cannot convert your TRIP to a lump sum unless you retire, or turn 65, or satisfy some other condition of release.
- If you run an SMSF, your pension account must be separate from the super account that accepts contributions.
I explain many more key features of a TRIP in the SuperGuide article TRIPS: 10 interesting facts about transition to retirement pensions.
Why bother with a TRIP, really?
Some individuals may start a transition-to-retirement pension (TRIP) simply because they need the extra income to survive, and to cover everyday expenses (see case study 1, later in article).
Starting a TRIP can provide flexibility for individuals wanting to gradually move into retirement by reducing working hours (see case study 2, later in article).
The major selling point however for many individuals considering the decision to start a TRIP, is that while you’re still working, you can access the tax advantages associated with superannuation pensions (income streams) while redirecting extra contributions to your super account (see case study 3, later in the article).
Tax advantages associated with superannuation pensions include:
- For under-60s: Tax-free investments earnings on assets financing the super pension. You also receive a 15% pension rebate (offset) on pension payments for under-60s. If you’re between the ages of 55 and 60 when you receive super benefits from your TRIP, you receive a 15% pension offset on the taxable component of the pension payments. The tax-free component of any pension payment is always tax-free, regardless of age
- For over-60s: Tax-free investments earnings on assets financing the super pension, and tax-free pension income for over-60s.
By taking advantage of the tax concessions associated with TRIPs, individuals are potentially able to boost their super accounts by redirecting the tax savings to their super account (see case study 3 later in the article). For example, one of the more popular TRIP strategies is to salary sacrifice into your super fund up to your concessional (before-tax) contributions cap (after also allowing for your employer’s Superannuation Guarantee payments), and replace the salary income with tax-free pension payments (if over 60), or concessionally taxed pension payments (if under 60).
Important: The general concessional contributions cap increases to $30,000 (from $25,000), effective from 1 July 2014. The special $35,000 cap for over-60s will also apply to over-50s from 1 July 2014 (or more specifically, to anyone who is aged 49 years or over on 30 June 2014). An increase in the concessional caps will generate greater interest in the popular transition-to-retirement pension/salary sacrifice strategy. If you’re considering such a strategy or considering reviewing an existing strategy, then seek taxation advice on the merits of such a strategy for your personal circumstances. I explain this strategy, using case studies, in the updated article below.
Note: SuperGuide regularly updates the case studies below, to reflect changes to the concessional contributions caps, and changes to the tax rates. The case studies are mere examples, and you will need to verify the effect of a TRIP on your personal circumstances with your accountant, your super fund or your financial adviser.
Depending on your super fund, you can start a TRIP with as little as $20,000, although you need to be mindful that drawing down on your super benefits before you retire can affect your lifestyle later on when you do finally retire. As I often say, just because you can, doesn’t mean you should. You will need to weigh your current financial needs against your needs for the future. Whether a TRIP, and related strategies, is right for you or not will also depend on many factors, including the level of your income, your super savings, and general financial needs and situation.
The three case studies below, illustrate the three most popular reasons for starting a transition-to-retirement pension, or the pension type that I call a TRIP.
Case study 1: Start a TRIP to access extra income
Facts: Marianne is 60 years of age and her salary is $72,000 per year. Marianne intends to continue working full-time, but she wants to increase her monthly income by accessing some of her super benefits via a transition-to-retirement pension. Marianne has $250,000 in her superannuation account. She elects to receive the maximum yearly pension payment of 10 per cent of her account balance, that is, $25,000 over the 12-month period. Her income increases dramatically, but she pays no extra tax on the additional income because it is sourced from tax-free superannuation pension payments. Her super savings however will be lower due to the pension payments.
|Case Study 1: Accessing extra income|
|Income working full-time – WITHOUT TRIP income||Income working full-time – WITH TRIP income|
|Transition to Retirement Income||Nil||$25,000|
|Tax (incl Medicare Levy)||$15,577||$15,577|
* Marianne is aged 60. Her income from a Transition to Retirement pension is tax free and non-assessable.
Table source: Originally supplied by Health Super, but since substantially updated by SuperGuide, in response to tax rates applicable to the 2013/2014 year, and with style amendments by SuperGuide.
Case study 2: Reduce work hours but maintain same lifestyle/income
Facts: Georgia is 55. She earns $73,000 per year, which leaves her with $56,633 after tax and Medicare Levy. Georgia needs all of this income to cover her living expenses. She currently works 5 days a week, but intends to reduce her hours to 4 days a week.
If Georgia works 4 days, her after-tax income would be cut by $9,512 per year (see Table 2.1 below). If, however, she starts a TRIP with her $120,000 superannuation account, and takes the maximum $12,000 in the first year, then her after-tax income will be $56,717 (see Table 2.2 below), virtually the same as her full-time income.
She can work 4 days but maintain the same income that she enjoyed as a full-time worker, but pays around $1900 less in income tax (after the pension rebate).
|Case Study 2: Reduce work hours but maintain lifestyle/income|
|Table 2.1: Georgia works 4 days|
|Georgia’s gross income (salary) for four days work (4/5 of $73,000)||$58,400|
|Deduct: Income tax (incl. Medicare Levy)||-$11,403|
|Add: Low Income Tax Offset||+$124|
|Total income tax (incl ML)||$11,279|
|Georgia’s net income (after-tax salary) for four days work||$47,121*|
*This level of income leaves Georgia with an income shortfall of $9,512 per year.
Table source: Originally supplied by Health Super, but since substantially updated by SuperGuide, in response to tax rates applicable for the 2013/2014 year, and with some style amendments by SuperGuide.
|Case Study 2: Reduce work hours but maintain lifestyle/income|
|Table 2.2: Georgia works 4 days PLUS starts a TRIP*|
|Georgia’s net income (salary) for four days work (4/5 of $73,000)||$58,400|
|Add: Income from TRIP||+$12,000|
|Deduct: Income tax (incl. Medicare)||-$15,483|
|Add: Low Income Tax Offset||$0|
|Add: 15% Rebate applied to TRIP||+$1,800|
|Georgia’s net income (after-tax salary) for four days work – including the income from her TRIP||$56,717|
*If Georgia was 60 years or older, she would pay no tax on the income from her TRIP, further increasing the tax advantages of taking a TRIP by nearly $2,500.
Table source: Originally supplied by Health Super, but since substantially updated in response to tax rates applicable for the 2013/2014 year, and with some style amendments by SuperGuide.
Case study 3: Boost your super while saving tax
Note: The general concessional contributions cap increases to $30,000 (from $25,000), effective from 1 July 2014. The special $35,000 cap for over-60s will also apply to over-50s from 1 July 2014 (or more specifically, to anyone who is aged 49 years or over on 30 June 2014). An increase in the concessional caps will generate greater interest in the popular transition-to-retirement pension/salary sacrifice strategy. If you’re considering such a strategy or considering reviewing an existing strategy, then seek taxation advice on the merits of such a strategy for your personal circumstances. I explain this strategy, using case studies, in the updated article below.
Facts: Martin is aged 58 and earns a salary of $80,000 each year plus 9% Superannuation Guarantee contributions. Martin wants to continue to receive his current net income while also maximising his super contributions.
Martin currently has $200,000 in super, which is split into $100,000 tax-free component and $100,000 taxable component. Martin realises the concessional cap for over-50s has halved to $25,000 and he is not sure whether a TRIP is still worthwhile for the 2013/2014 year, even though Martin’s concessional cap will increase to $35,000 for the 2014/2015 year. (From 1 July 2014, anyone aged 49 years or over on 30 June 2014 can make concessional contributions of up to $35,000.)
Martin salary sacrifices $17,000 per year from his salary into his super account (in addition to his employer’s 9.25% SG contributions of $7,400), and stays within his 2013/2014 concessional cap of $25,000. Martin wants to receive a similar net income, so he starts a transition-to-retirement pension (TRIP) and draws $10,000 per year – 5% of his account balance, which is less than the 10% maximum withdrawal permitted each year, and more than the 4% minimum withdrawal required each year.
The table below illustrates that by using the TRIP and salary sacrificing strategy, Martin has maintained his income (give or take $1,500 a year), while boosting his super account by an additional $4,450 each year due to the tax savings from taking a TRIP, and salary sacrificing. If Martin continues this strategy after age 60, the amount withdrawn from his super is 100% tax-free.
Outcome: In his circumstances, Martin will have to decide whether the strategy (and a slight drop in current income), is worth the additional super contributions and potential associated costs of having a pension account as well as a superannuation (accumulation) account. He could also choose to withdraw a greater amount as a TRIP (up to 10% of the account balance), but in his specific circumstances, if he does this, the growth in his super savings from salary sacrificing will be minimal.
Outcome if Martin was 60 years or over: If Martin was aged 60 years or over, the tax benefits of a TRIP/salary sacrificing strategy are clearly more enticing due to the replacement of taxable income with tax-free pension income. For example, on Martin’s level of salary, if he made higher concessional contributions on or after the age of 60 and also started a TRIP , he can secure an equivalent after-tax income, a larger super benefit and higher total tax savings compared with doing nothing, or making smaller salary sacrificed contributions.
Tip: The higher the salary you earn, the more likely that the TRIP/salary sacrifice strategy will deliver you tax advantages.
|Case study 3: Boost your super while saving tax* (for 2013/2014 year)|
Using TRIP/Salary sacrifice strategy
|Martin||Current position||Under 60||On or after age 60*||Age 60* and higher salary sacrifice|
|Martin’s Gross Income (Salary)||$80,000||$80,000||$80,000||$80,000|
|Deduct: Salary Sacrifice into super||$0||$17,000||$17,000||$27,000|
|Add: Super pension drawn||$0||$10,000||$10,000||$14,000|
|Deduct: Non-assessable Super Pension (tax-free component)||$0||$5,000||$10,000||$14,000|
|Deduct: Income Tax (incl. Medicare Levy) and less low income tax offset in Columns 4 & 5||$18,747||$14,667||$12,912||$9,362|
|Add: 15% Pension Rebate||$0||$750||$0||$0|
|Martin’s Net income (including pension income)||$61,253||$59,083||$60,088||$59,638|
|Martin’s super savings|
|9.25% SG contributions net of 15% contributions tax||$6,290||$6,290||$6,290||$6,290|
|Salary sacrificed contributions||$0||$17,000||$17,000||$27,000|
|Less: Super contributions tax paid on Sal Sacrifice||$0||$2,550||$2,550||$4,050|
|Gain in Super Balance each year (excluding investment earnings) due to TRIP strategy||$0||$4,450||$4,450||$8,950|
|Total taxes paid (including income tax & ML, contributions tax and less pension rebate)||$19,857||$17,577||$16,572||$14,522|
*Salary Sacrifice and the 9.25% Superannuation Guarantee contributions are taxed at 15 per cent. Withdrawals and pension payments after age 60 are tax free. ‘Income tax’ includes Low Income Tax Offset, where applicable
Table source: Originally supplied by Health Super, but since radically altered, and updated in response to tax rates applicable for 2013/2014 year, and reduced concessional contributions caps by SuperGuide.