Important! Since 1 July 2017, the tax exemption on fund earnings financing a transition-to-retirement pension (TRIP) has been removed. The super laws no longer consider a TRIP to be a superannuation income stream in retirement phase. This change applies to TRIPs in place before July 2017 as well as TRIPs commenced on or after 1 July 2017.
A transition-to-retirement pension (what SuperGuide has always called a TRIP, and now the federal government has also chosen to follow our lead and call it a TRIP) enables any Australian who has reached their preservation age (at least age 55, and moved to at least 58 years since 1 July 2017, depending on your date of birth), to access his or her superannuation benefits in the form of a pension 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. Anyone born after 30 June 1964 has a preservation age of 60 years. Anyone born after 30 June 1960 has a preservation age of at least 56 years, and anyone born after 30 June 1961 has a preservation age of at least 57 years, and anyone born after 30 June 1962 has a preservation age of at least 58 years. For more information on your preservation age, see SuperGuide article Accessing super: What is my preservation age?
- 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. Before July 2017, there was one exception to the ‘no lump sum’ rule, and this applied when the fund member had some unrestricted non-preserved benefits in the TRIP account. You may have unrestricted non-preserved benefits if you were a fund member before July 1999. If so, these benefits are not preserved and, before July 2017, could be accessed as a lump sum from the TRIP account, without breaking the TRIP rules. Since 1 July 2017, the option of treating a TRIP payment as a lump sum (or a lump sum payment as a pension payment) is no longer possible.
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, was that, until 30 June 2017, while you’re still working, you could 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). Note that since 1 July 2017, the government has removed the tax exemption on pension asset earnings for TRIPs.
Tax advantages associated with superannuation pensions include:
- For under-60s: Until 30 June 2017, TRIPs enjoyed tax-exempt investment earnings on assets financing the super pension, like other super pensions. Running a TRIP, you still however receive a 15% pension rebate (offset) for income tax on pension benefit payments for under-60s (and this offset continues beyond 30 June 2017). If you’re between your preservation age and age 60 when you receive super pension payments from your TRIP (or from an account-based pension), 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 more information, see SuperGuide article Retiring before the age of 60: the tax deal.
- For over-60s: Until 30 June 2017, TRIPs enjoyed tax-exempt investment earnings on assets financing the super pension, like other super pensions. Running a TRIP, you still however receive tax-free pension income on or after the age of 60. For more information, see SuperGuide article Tax-free super for over-60s, except for some.
Until 30 June 2017, by taking advantage of the tax concessions associated with TRIPs, individuals were 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 was 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: From the 2017/2018 year onwards, a single annual concessional cap of $25,000 applies to all ages. The special $35,000 cap applied to over-50s for the 2016/2017 year (more specifically, to anyone who was aged 49 years or over on 30 June 2016, for the 2016/2017 year).
If you’re considering taking advantage of the transition-to-retirement pension/salary sacrifice strategy (see case studies later in the article), or considering reviewing an existing strategy, then seek taxation advice on the merits of such a strategy for your personal circumstances, especially the implications since July 2017 onwards, including capital gains tax relief for a pre-existing TRIP.
What happens to my TRIP from 1 July 2017?
If you had a TRIP in place before July 2017, then you should have reviewed your circumstances, or be reviewing your TRIP now, to determine the impact of your TRIP no longer being considered a superannuation income stream in retirement phase. The most significant implication is losing the tax exemption on the fund earnings from assets financing the TRIP. Moving assets back to accumulation phase, may also mean that assets previously exempt from capital gains tax, have now become assessable.
CGT relief: For SMSF trustees in particular, if a pension asset becomes an asset in accumulation phase, then a line will need to be drawn on the value at the time of transfer to ensure previously tax-exempt capital gains are not taxed in the future. In March 2017 (and updated in late 2017), the ATO released some guidance on possible CGT relief: see the ATO Law Companion Guideline, LCG2016/8 Superannuation reform: transfer balance cap and transition to retirement transitional CGT relief for superannuation funds.
In short, a decision needs to be made about whether an SMSF will seek CGT relief by the due lodgement date for the 2017 SMSF return (which has been extended to 30 June 2018). For background on the CGT relief rules, see also SuperGuide article CGT relief and the $1.6 million transfer balance cap, and TRIPs.
Case studies: How does a TRIP work?
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 (looking at pre-July 2017 rules, and comparing with the 2017/2018 year, when the tax exemption on TRIPs earnings was removed), illustrate the three most popular reasons for starting a transition-to-retirement pension, that is, the pension type that I call a TRIP. Since the 2017/2018 year, TRIPs do not receive a tax exemption on earnings from pension assets, and this change makes TRIPs less attractive for many Australians.
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, payable monthly, over the 12-month period from July through to June. Her income increases dramatically, but she pays no extra tax on the additional income because it is sourced from tax-free superannuation pension payments. The size of her overall super and pension account balances will be affected however, due to the pension payments.
Table 1: Marianne starts a TRIP to access EXTRA INCOME
|Income working full-time –
WITHOUT TRIP income
|Income working full-time –
WITH TRIP income (2016/2017 year)
|Income working full-time –
WITH TRIP income
|Transition to Retirement Income||Nil||$25,000||$25,000|
|Income Tax (incl Medicare levy)||$16,387||$16,387||$16,387|
* Marianne is aged 60. Her pension payment income from a transition-to-retirement pension is tax free and non-assessable. Tax rates and Medicare levy used in the table above are applicable for the 2016/2017 year, and for the 2017/2018 year.
Case study 2: Reduce work hours but maintain same lifestyle/income
Facts: Georgia is 57. She earns $73,000 per year, which leaves her with $56,328 after income 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 income would be reduced to $58,400, and her after-tax income (and after Medicare levy) would be cut by $9,499 per year to $46,829 (see Table 2.1 below). If, however, she starts a TRIP with her $120,000 superannuation account balance, and takes the maximum $12,000 in the first year, then her after-tax income for the 2016/2017 year is $56,365 (see Table 2.2 below), virtually the same as her full-time after-tax income. For the 2017/2018 year, her after-tax income is the same as the 2016/2017 year.
From the 2017/2018 year onwards, she can work 4 days but maintain nearly the same income that she enjoyed as a full-time worker, but she needs to be aware that the pension earnings are no longer be exempt from the 15% earnings tax (since 1 July 2017), which affects the size of her TRIP account balance, since earnings tax needs to be deducted.
Table 2.1: Georgia reduces work hours to 4 days
|2016/2017 year||2017/2018 year|
|Georgia’s gross income (salary) for 4 days of work (4/5 of $73,000)||$58,400||$58,400|
|Deduct: Income tax (incl. Medicare Levy)||-$11,695||-$11,695|
|Add: Low Income Tax Offset||+$124||+$124|
|Total income tax (incl ML)||$11,571||$11,571|
|Georgia’s net income (after-tax salary) for working 4 days||$46,829*||$46,829*|
*This level of income leaves Georgia with an income shortfall of $9,499 per year, compared with working full-time (5 days). Tax rates and Medicare levy used in the table above are applicable for the 2016/2017 year, and for 2017/2018 year.
Table 2.2: Georgia works 4 days PLUS starts a TRIP*
|2016/2017 year||2017/2018 year|
|Georgia’s net income (salary) for 4 days of work (4/5 of $73,000)||$58,400||$58,400|
|Add: Income from TRIP||+$12,000||+$12,000|
|Deduct: Income tax (incl. Medicare)||-$15,835||-$15,835|
|Add: Low Income Tax Offset||$0||$0|
|Add: 15% Rebate applied to TRIP||+$1,800||+$1,800|
|Georgia’s net income (after-tax salary) for working 4 days– including the income from her TRIP||$56,365||$56,365|
*If Georgia was 60 years or older, she would pay no tax on the income from her TRIP, further increasing the income tax advantages of taking a TRIP by around $2,000 (but also noting that TRIP earnings within the super fund are no longer tax exempt since 1 July 2017). Tax rates and Medicare levy used in the table above are applicable for the 2016/2017 year, and for the 2017/2018 year.
Case study 3: Boost your super while saving tax
If you’re considering reducing your taxable income by making concessional contributions to your super fund, and supplementing your reduced income by starting a TRIP, or you are considering reviewing an existing strategy, then seek taxation advice on the merits of such a strategy for your personal circumstances.
Note: The special $35,000 concessional contributions cap for over-50s is $35,000 (more specifically, to anyone who is aged 49 years or over on 30 June 2016, for the 2016/2017 year). Since 1 July 2017, the annual concessional contributions cap for all ages drops to $25,000.
Facts: Martin is aged 58 and earns a salary of $80,000 each year plus 9.5% 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 salary sacrifices $25,000 per year from his salary into his super account (in addition to his employer’s 9.5% SG contributions of $7,600), and stays within his 2016/2017 concessional cap of $35,000. 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.
Note: Since 1 July 2017, Martin needs to drop his voluntary concessional contributions to $17,400 to stay within the lower 2017/2018 annual concessional cap of $25,000.
The table below illustrates that by using the TRIP and salary sacrificing strategy during the 2016/2017 year, Martin has taken a slight drop in income, while boosting his super account by an additional $11,250 (after contributions tax) 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. Note that taking effect since 1 July 2017, the government has abolished the tax exemption on earnings from TRIP assets.
For the 2017/2018 year, and due to the lower concessional cap, Martin has maintained the income he would have received if he hadn’t undertaken the TRIP and salary sacrificing strategy, although his TRIP earnings will not be exempt from tax, as they were during the 2016/2017 year, and the boost to his super account and tax savings are not as high as previously.
Outcome: In his circumstances, Martin will have to decide whether the strategy (and a drop in current income for the 2016/2017 year), is worth the additional super contributions and potential associated costs of having a TRIP 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 smaller. Note again that taking effect since 1 July 2017, the government has abolished the tax exemption on earnings from TRIP assets.
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 benefit payments. Note again that taking effect since 1 July 2017, the government abolished the tax exemption on earnings from TRIP assets, although benefit payments for over-60s will continue to be tax-free.
Table 3: Using TRIP/Salary sacrifice strategy
|Martin||Current position||Under 60 (2016/2017 year)||On or after age 60* (2016/2017 year)||On or after age 60* (2017/2018 year)|
|Martin’s Gross Income (Salary)||$80,000||$80,000||$80,000||$80,000|
|Deduct: Salary Sacrifice into super||$0||$25,000||$25,000||$17,400|
|Add: Super pension drawn||$0||$10,000||$10,000||$10,000|
|Deduct: Non-assessable Super Pension (includes tax-free component)||$0||$5,000||$10,000||$10,000|
|Deduct: Income Tax (incl. Medicare Levy) and less low income tax offset in Columns 3 & 4||$19,147||$12,147||$10,422||$11,892|
|Add: 15% Pension Rebate||$0||$750||$0||$0|
|Martin’s Net income (including pension income)||$60,853||$53,603||$54,578||$60,708|
|Martin’s super savings|
|9.5% SG contributions net of 15% contributions tax||$6,460||$6,460||$6,460||$6,460|
|Salary sacrificed contributions||$0||$25,000||$25,000||$17,400|
|Less: Super contributions tax paid on Sal Sacrifice||$0||$3,750||$3,750||$2,610|
|Less: TRIP drawdown||$10,000||$10,000||$10,000|
|Total gain in super balance each year (excluding net investment earnings)||$17,710||$17,710||$13,599|
|Gain in Super Balance due solely to TRIP/SS strategy (excluding net investment earnings)||$0||$11,250||$11,250||$4,790|
|Total taxes paid (including income tax & ML, contributions tax and less pension rebate)||$19,147||$15,147||$14,172||$14,502|
*Salary Sacrifice and the 9.5% Superannuation Guarantee contributions are taxed at 15 per cent, although we have removed the contributions tax on SG contributions from the comparison as this is constant throughout all scenarios. Withdrawals and pension payments after age 60 are tax free. ‘Income tax’ includes Low Income Tax Offset, where applicable. Tax rates and Medicare levy used in the table above are applicable for the 2016/2017 year, and for the 2017/2018 year.
For more information…
You can read more about TRIPs and how they work in the SuperGuide articles: