- Who is eligible to start a transition to retirement pension?
- What are the pros and cons of transition to retirement pensions?
- What are the rules for starting a TTR?
- How do you stop a transition to retirement pension?
- How do self-managed super funds (SMSFs) start a TTR?
- What are important considerations for SMSFs while a TTR is in place?
- The bottom line
Transition to retirement income streams (or pensions) allow you to gradually draw on your super benefits while you’re still working and moving towards your retirement. They go by a variety of acronyms, including TTR and TRIS. For simplicity, we’ll use the TTR acronym in this article.
There are different ways that you can use a TTR income stream. For example, you can choose to:
- Work less hours and use a TTR pension to supplement your income.
- Salary sacrifice some of your salary into super so you can save tax and use a TTR pension to supplement your income.
Note: From 1 July 2017, the investment returns on the assets underlying a TTR pension are taxed at up 15% just as they are in a super accumulation account – previously they were tax-free. To learn more, see SuperGuide article Did tax kill the transition to retirement magic pudding?
Who is eligible to start a transition to retirement pension?
You must have reached your preservation age to be eligible for a TTR income stream or pension. Your preservation age is between 55 and 60, depending on your date of birth.
What are the pros and cons of transition to retirement pensions?
TTRs have their benefits and drawbacks so it’s essential to consider whether they could be appropriate for your situation.
They enable you to:
- Ease into retirement by helping you to maintain your income and lifestyle.
- Continue to make contributions to your accumulation account (or have them made by your employer).
- Receive tax-free pension payments (if you’re aged over 60).
- Grow your super and save tax via salary sacrificing. If you salary sacrifice into super, your contributions are taxed at the concessional rate of 15%, up to a cap (currently $25,000 per year). This can be a good strategy for mid-to-high income earners, as illustrated in the below example.
Jeff is 61 and still working. His taxable income is in the 37% marginal tax rate bracket. He wants to reduce the amount of tax he pays and grow his super art the same time. He decides to a salary sacrifice $25,000 into super and receive that amount as a TTR pension instead.
Jeff’s $25,000 salary sacrifice into super will be taxed at 15% ($3,750) instead of at 37% ($9,250) if he took at as a salary instead. This will save him $5,500 tax in the first year he sets up the TTR pension. He could continue this arrangement for until he turns 65.
- The more of your super funds that you withdraw during your TTR phase, the less money you’ll have available when you do retire.
- If you’re aged between 55-59, the taxable portion of your TTR pension payments is taxed at your marginal rate less a 15% tax offset.
- If you or your partner are currently receiving any social security payments, a TTR pension may affect your entitlements.
- If you have life insurance cover in your fund, setting up a TTR may affect your level of coverage.
- TTRs were more a more attractive option before the government introduced a 15% earnings tax on TTR pension accounts (previously these earnings were tax-free).
- The tax savings of salary sacrificing schemes into super may not be worthwhile for low income earners, as illustrated in the below example:
Dan is 59 but has reached his preservation age. He taxable income is in the 19% marginal tax rate bracket. He has heard that salary sacrificing can be a good way to reduce your tax and boost your super. He can afford to salary sacrifice $5,000 into super.
Dan would only save 4% tax by doing this (i.e. $200), though his super balance will increase.
What are the rules for starting a TTR?
Firstly, your super fund must be an accumulation fund to enable you to start a TTR pension, it can’t be a defined benefit fund. Only about 10% of Australians are members of defined benefit funds.
You start a TTR pension by transferring some of your super funds from your accumulation account into your pension account. Most super funds offer a pension account, but if your fund doesn’t, you can start a pension account with a fund that does. The transferred funds don’t count as part of your transfer balance cap because you’re still working and therefore you aren’t in the retirement phase. However the funds in your TTR pension account will count towards your transfer balance cap once you do retire. The cap is currently $1.6 million.
You must leave at least a small balance in your accumulation account when you set up your TTR pension account. Your accumulation account needs to remain open to receive your employer’s compulsory 9.5% super guarantee contributions or any voluntary contributions that you may want to make (such as salary sacrificing arrangements).
The investment earnings in both your accumulation and pension accounts are taxed at 15%.
You must withdraw a minimum of 4% of your pension account balance each year if you’re aged under 65 and you can withdraw a maximum of 10%. Note that there are different minimum pension payment percentages once you are over the age of 65. See SuperGuide article Guide to minimum pension payments rules (including calculator) for more information.
At least one withdrawal must be made each year. Your pension can only be transferred to another person if you die.
If you’re aged 65 and over, there are no restrictions on the amount of super you can withdraw as you’ve met a legal condition of release even if you’re still working. You don’t need to start a TTR pension. You can set up a normal instead.
How do you stop a transition to retirement pension?
A TTR pension automatically converts to an account-based pension when you meet a superannuation condition of release (such as retiring from the workforce or reaching the age of 65). When your TTR pension becomes an account-based pension, you’ll be entitled to tax-free investment earnings and you’ll no longer have any withdrawal restrictions.
You can also transfer your pension account funds back into your accumulation account at any time. You must still have made the minimum 4% withdrawal (if you are aged under 65) in the financial year that you wish to cease your TTR pension.
How do self-managed super funds (SMSFs) start a TTR?
SMSF trustees can start a TTR pension for their members provided that this is allowed for in the SMSF’s trust deed. The trust deed is a legal document that must be prepared when the fund is set up to outline how the fund will operate and how it will be managed.
If you’re the trustee of an SMSF and you’re starting a TTR for yourself or other members of your fund, you should get independent professional advice to help you do it and ensure your compliance with super legislation.
It’s important to establish the mix of assets that you (or your fund members) have in your SMSF prior to setting up a TTR pension. This could include a mix of:
- unrestricted non-preserved benefits (these benefits don’t require a superannuation condition of release to be met to be accessed),
- restricted non-preserved benefits, and
- 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 accordingly.
It’s important to understand that if assets that will support the TTR pension have both taxable and non-taxable components, you (or your member) can’t choose to apply one or the other components to the pension. The 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 support the TTR pension.
What are important considerations for SMSFs while a TTR is in place?
Record-keeping is crucial if you’re paying a TTR pension to yourself or another fund member via your SMSF. You need to keep records that show:
- The value of the TTR pension 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 that support the TTR pension after payments have been made.
- The date that you (or your 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 (and which are therefore taxable at 15%).
In addition, it’s important to ensure that:
- Any fund contributions that are received by you (or your fund member) or your employer are kept separate from the super benefit that is supporting the TTR.
- You pay the minimum annual TTR pension amount (i.e. 4% of the account balance) and don’t exceed the maximum (i.e. 10%).
- You pay 15% tax on earnings from the assets that support the TTR pension. You (or the member receiving the TTR 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. The Australian Taxation Office can impose a range of penalties on SMSF trustees for non-compliance.
There are pros and cons of TTR pensions. Deciding whether or not to begin one is an important decision. It’s worthwhile to seek independent professional advice about whether it is an appropriate strategy for your individual financial circumstances and goals. The information contained in this article is general in nature.