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 (
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 three main conditions:
- You must have reached your
- You cannot convert your TRIP into a lump sum unless you retire, or turn 65, or satisfy some other condition of release.
- You can withdraw no more than 10% of the value of your pension account balance each financial year (and withdraw a minimum of 4% of the value of your pension account balance.
I explain many more key features of a TRIP in the SuperGuide.com.au 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 one later in article).
Starting a TRIP can provide flexibility for individuals wanting to gradually move into retirement by reducing working hours (see case study two later in article).
The major selling point however for many individuals making the decision to start a TRIP, is that while you’re still working, you can access the tax advantages associated with income streams such as:
- Under-60s: 15% pension rebate (offset) on pension income 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
- Over-60s: Tax-free earnings and tax-free pension income for over-60s.
By taking advantage of the tax concessions associated with TRIPs, individuals are then able to boost their super accounts by redirecting the tax savings to their super account (see case study three 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, and replace that income with tax-free (if over 60), or concessionally taxed pension payments (if under 60).
According to industry fund, Health Super, you can start a TRIP with as little as $20,000. Health Super’s chief operating officer, Carol McKelson-Timmins warns that you need to be aware of the long-term impact a transition-to-retirement pension may have on your super benefits.
“A transition to retirement pension is not for everyone. You need to weigh your current financial needs against your needs for the future… Whether it’s right for you or not will also depend on a range of factors such as your income, super savings, and general financial needs and situation, so it’s important to seek financial advice before deciding to go down this path,” says McKelson-Timmins.
Health Super has produced 3 case studies illustrating the three most popular reasons for starting a transition-to-retirement pension, or the pension type that I call a TRIP.
Case study one: Accessing extra income
Facts: Mary is 60 years of age and her salary is $72,000 per year. Mary 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. Mary has $250,000 in her superannuation account. She elects to receive the maximum yearly payment of 10 per cent of her account balance, that is, $25,000 over the 12 months.
| Case Study 1: Accessing extra income | ||
| Income working full-time – WITHOUT TRIP income | Income working full-time – WITH TRIP income | |
| Employer salary | $72,000 | $72,000 |
| Assessable Income | $72,000 | $72,000 |
| Transition to Retirement Income | Nil | $25,000 |
| Taxable Income | $72,000 | $72,000* |
| Tax (including Medicare levy) | $16,680 | $16,680 |
| Net Income | $55,320 | $80,320 |
* Mary is aged 60. Her income from a Transition to Retirement pension is tax free and non assessable.
Table source: Health Super, with some style amendments by SuperGuide.
Case study two: Reducing work hours but maintaining same lifestyle
Facts: June is 55. She earns $73,000 per year, which leaves her with $56,455 after tax. June 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 June works 4 days, her income would be cut by $9,407 per year (see Table 1 below). If 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 would remain at $56, 455 (see Table 2 below).
She can work 4 days but maintain the same income that she enjoyed as a full-time worker.
| Case Study 2: Reducing work hours but maintaining lifestyle | |
| Table 1: June works 4 days | |
| June’s gross income (salary) for four days work (4/5 of $73,000) | $58,400 |
| Deduct: |
-$11,946 |
| Add: Low Income Tax Offset | +$364 |
| Add: Mature Age Worker Tax Offset | +$230 |
| June’s net income (after-tax salary) for four days work | $47,048* |
*This level of income leaves June with an income shortfall of $9,407 per year.
Table source: Health Super, with some style amendments by SuperGuide
| Case Study 2: Reducing work hours but maintaining lifestyle | |
| Table 2: June works 4 days and starts a TRIP* | |
| June’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) | -$15,726 |
| Add: Low Income Tax Offset | $0 |
| Add: Mature Age Worker Tax Offset | $0 |
| Add: Rebate applied to TRIP | +$1,800 |
| June’s net income (after-tax salary) for four days work – including the income from her TRIP | $56,474 |
*If June 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.
Table source: Health Super, with some style amendments by SuperGuide
Case study three: Boosting your super while saving tax
Facts: Max is aged 57 and earns a salary of $80,000 each year plus 9% Superannuation Guarantee contributions. Max wants to continue to receive his current net income while also maximise his super contributions.
Max currently has $200,000 in super, which is split into $100,000 tax-free component and $100,000 taxable component. Max salary sacrifices $27,000 per year (transitional concessional contributions cap for over-50s is $50,000 until June 2012) from his salary into his super account. Max wants to receive the same net income, so he starts a transition-to-retirement pension (TRIP) and draws $20,000 per year – 10% of his account balance is the maximum withdrawal permitted each year.
The table below illustrates that by using the TRIP and salary sacrificing strategy, Max has boosted his super account by an additional $3,000 each year due to the tax savings from taking a TRIP and salary sacrificing. If Max continues this strategy after age 60, the amount withdrawn from his super is tax-free. He could then salary sacrifice $30,000 each year (subject to the contributions caps remaining at $50,000 for over-50s beyond June 2012, for those individuals with less than $500,000 in super – yet to be legislated). Such a strategy then increases Max’s super by more than $5,000 each year.
| Case study 3: Boosting your super while saving tax* | |||
| Max | Current position | With TRIP strategy under 60 | With TRIP strategy after age 60* |
| Max’s Gross Income (Salary) | $80,000 | $80,000 | $80,000 |
| Add: 9% SG contributions | $7,200 | $7,200 | $7,200 |
| Deduct: Salary Sacrifice into super | $0 | $27,000 | $30,000 |
| Add: Super pension drawn | $0 | $20,000 | $20,000 |
| Deduct: Non-assessable Super Pension (tax-free component) | $0 | $10,000 | $20,000 |
| Deduct: Income Tax (incl. Medicare Levy) | $18,750 | $13,215 | $8,600 |
| Add: 15% Pension Rebate | $0 | $1,500 | $0 |
| Max’s Net income | $61,250 | $61,285 | $61,400 |
| Max’s Super contributions (net of 15% super contributions tax) | $6,120 | $29,070 | $31,620 |
| Increase in Max’s Super Balance each year (excluding |
$0 | $2,950 | $5,500 |
*Salary Sacrifice and the 9% 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
Table source: Health Super, with some style amendments by SuperGuide
G’day Trish,
I’m a little confused on the mature age worker’s offset because different sources provide conflicting info. According to the ATO and CCH books, super pension income is not “income from working” and the CCH “Master Financial Planning Guide 2010/11″ on page 53 says the offset is worked out on “net income from working”.
That same CCH book has an example on page 854, as your example does above from Health Super, that seems to take the TRIP income into account when calculating the offset. So, unless I’m totally lost, CCH is contradicting itself.
I must be missing something, can you please confirm if a super income stream is included when calculating this offset? Thanks.
Hi Adam
Thanks for your comment. Generally speaking, we cannot comment on the non-super tax rules, such as the mature age workers offset (MAWO). What we can say is that, according to the ATO website, the MAWO is linked to net income from working rather than TRIP income. The tables presented in the article above don’t provide the background calculations, but the MAWO is based on net income from working, and not based on TRIP income. Note however that ‘reportable employer super contributions’ also count towards ‘net income from working’.
Quoting directly from the ATO website: “to be eligible for the mature age worker tax offset in 2009–10, you must:
* be an Australian resident for tax purposes
* be aged 55 years or more at the end of the income year, and
* have received net income from working (within certain limits).
Again quoting directly from the ATO website:
“Net income from working includes:
the total of amounts of assessable income that are mainly a reward for your personal effort or skills
less any related deductions and income from a business that you carry on
less any related deductions.
Reportable employer super contributions are now included when calculating your net income. Reportable employer super contributions are salary sacrificed super contributions or other contributions your employer makes to a super fund on your behalf that are additional to the minimum contributions they must make.
Your net income from working is used to calculate the amount of mature age worker tax offset that you are entitled to.
Income from working includes:
* salary and wages
* allowances, earnings, tips and commissions
* regular periodic payments under a sickness and accident or insurance policy or worker’s compensation scheme
* business income from a business that you carry on
* personal services income (PSI)
* foreign employment income
* assessable farm management deposit withdrawal amounts
* reportable fringe benefits
* reportable employer super contributions
* income derived by a professional sports person or entertainer from the exercise of personal expertise or skill
* other income from working such as commissions, bonuses and fees paid to directors or office holders
* income derived by consultants for the exercise of personal expertise.
Income from working does not include:
* social security benefits – payments received from Centrelink or the Department of Veterans’ Affairs
* interest income
* dividends and commodity gains
* trust distributions
* capital gains
* superannuation pensions or annuities
* lump sum payments received on retirement or termination of employment in lieu of long service leave and annual leave
* employment termination payments
* rental income
* royalties or amounts received from the assignment of intellectual property.”
[end of extract from ATO website]
I trust this assists you with your question.
Regards
Trish
I was very impressed with the your case studies.I will turn 55 in Jan 2012 .Will I be able to draw 10% pension from my super account while I am still fulltime employed ?.My balance is $320K with gross income $75K.
Thank you
Hi Dean
Thanks for your email. We answer a similar question to your own in the following article:
http://www.superguide.com.au/boost-your-superannuation/transition-to-retirement-pension-can-i-work-full-time-and-take-a-trip
Regards
Trish