- 1. You must have reached preservation age.
- 2. Tax breaks on TRIPs were compelling, until 30 June 2017.
- 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 before July 2017).
- 6. A popular TRIP strategy until 30 June 2017.
- 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 no longer require segregation.
- 10. A TRIP is not necessary if you can already access your super.
- For more information…
Important! Since 1 July 2017, the tax exemption on pension fund earnings financing a transition-to-retirement pension (TRIP) has been removed. This change applies to TRIPs in place before July 2017 as well as TRIPs commenced on or after 1 July 2017. This super change became law in November 2016.
Note: The special $35,000 concessional contributions cap for over-50s that applied for the 2016/2017 year (or more specifically, applied to anyone who was aged 49 years or over on 30 June 2016), has dropped to $25,000 for all age groups, since 1 July 2017. 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 now increased to age 58 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 (for more information on your preservation age see first fact below).
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 management. The key message many advisers have used when recommending a TRIP is: most Australians who have reached preservation age (at least 55, and now increased to age 58 and older since 1 July 2017) can boost super savings while cutting their tax bill, depending on an individual’s level of income and marginal tax rate.
Super alert! The removal of the tax exemption on the earnings derived from TRIP assets since 1 July 2017, has neutralised the tax benefits of TRIPs for many Australians for the following reasons:
- A TRIP is no longer considered a superannuation income stream in the retirement phase, which means the TRIP assets are treated as super assets in the accumulation phase, which means any earnings on those assets are subject to 15% earnings tax. If you currently have a TRIP and you have not yet considered the capital gains tax implications for your TRIP assets, we suggest you chat to your adviser immediately, and/or see the ATO Law Companion Guideline, LCG2016/8 Superannuation reform: transfer balance cap and transition to retirement transitional CGT relief for superannuation funds.
- Any benefit payments from a TRIP received when under the age of 60, continue to be eligible for the 15% pension tax offset.
15% pension tax offset remains in place: According to an ATO spokesperson: “[Since] 1 July 2017, the earnings from assets supporting a transition to retirement income stream (TRIS) [TRIP] [are no longer] subject to an earnings tax exemption, i.e. [are no longer] exempt current pension income. The change is only in relation to the tax treatment at the super fund level – there has been no change to the tax treatment of a TRIS benefit paid to an individual member. Therefore there are no changes to the way tax offsets operate for the individual receiving the TRIS payment. A TRIS [TRIP] will continue to meet the definition of a superannuation income stream in the Income Tax Assessment Act 1997 (ITAA), however it will not be a superannuation income stream in the retirement phase under the new section 307-80(3)(a) of the ITAA.”
Until 30 June 2017, one of the more popular TRIP strategies was 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 would 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 worked before July 2017, but also note that earnings on assets financing TRIPs are no longer tax-exempt since 1 July 2017).
Note: The over-50s (aged 49 years or over on 30 June 2016) concessional contributions cap for the 2016/2017 year is $35,000 for anyone aged 49 years or over on 30 June 2016 (for the 2016/2017 year), and has dropped to $25,000 since 1 July 2017.
Want to know more? Check out the following 10 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, increased to 56 years and older since 1 July 2015, and increased to 57 years and older since 1 July 2016, and effectively increased to 58 years and older since 1 July 2017), 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). For more information on your preservation age, see SuperGuide article Accessing super: What is my preservation age?
|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 were compelling, until 30 June 2017.
Any earnings on assets financing your transition-to-retirement pension (TRIP) were exempt from earning tax before July 2017, although this exemption has been removed for TRIPs since 1 July 2017. When you receive pension payments from a TRIP and you’re over 60, your pension payments are tax-free (and continues to apply post-July 2017). If you’re under the age of 60, the taxable component of pension payments is taxed but you gain access to a pension tax offset of 15% (the 15% pension offset continues to be available on TRIP payments since 1 July 2017). The tax-free component of the pension is 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 2017/2018 year (or for the 2018/2019 year), is 4% of the account balance as at 1 July 2017 (or for the 2018/2019 year, as at 1 July 2018, see table below). You must meet this requirement even though, since 1 July 2017, a TRIP is no longer considered a superannuation income stream. 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. For more information on minimum pension payments see SuperGuide article Minimum pension payments for 2017/2018 year (and for 2016/2017 year).
Minimum account-based pension payments: for 2017/2018 and 2018/2019 years
|Age of pension account-holder||Percentage factors|
|65 to 74||5%|
|75 to 79||6%|
|80 to 84||7%|
|85 to 89||9%|
|90 to 94||11%|
|Aged 95 or older||14%|
Note: Amount calculated on 1 July each year, unless first year of account-based pension, and then pro-rated from commencement day. If commencement day of the super pension is on or after 1 June of the financial year, then no minimum payment is required for that financial year. Minimum amount to be rounded to nearest $10.
5. You cannot withdraw lump sums from your TRIP (except in one instance before July 2017).
Until 30 June 2017, a TRIP was like any other account-based pension (income stream), with two major exceptions: you could only withdraw a maximum of 10% from a TRIP (refer to Fact 3), and in nearly all cases, you could not withdraw lump sums until you retired, or until you satisfied another condition of release such as reaching the age of 65. Since 1 July 2017, a TRIP is no longer treated as a super pension (income stream) in retirement phase; rather the income stream is considered to be in accumulation phase.
Note: Generally speaking, you cannot convert your TRIP to a lump sum. In other words, a TRIP is a non-commutable income stream in most instances. The one exception to the non-commutable rule, which applied before July 2017 (but does not apply post-July 2017) wass when the fund member had unrestricted non-preserved benefits in the TRIP account. You may have these type of benefits if you were a fund member before July 1999. If so, until 30 June 2017, this category of benefits could be accessed as a lump sum without breaking the TRIP rules. Until 30 June 2017, the lump sum counted towards the minimum pension payment amount required to be paid each year (see Fact 4), but did not count towards the 10% maximum payment limit (see Fact 3).
Important: Since 1 July 2017, the option of treating a pension payment as a lump sum (or a lump sum payment as a pension payment) is no longer possible.
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. Alternatively, once you retire, you can continue your TRIP but as a regular account-based pension, subject to the rules of your super fund (and subject to confirmation from the government that this approach continues to be available).
6. A popular TRIP strategy until 30 June 2017.
Before July 2017, a popular TRIP strategy was 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 could 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 were exempt from tax within the fund (although TRIPs have lost this tax exemption on earnings since 1 July 2017), and super contributions are 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 was higher than $300,000 – and since 1 July 2017, higher than $250,000 – your concessional super contributions are hit with an additional 15% tax, taking total tax on super contributions to 30%.)
- pension payments from a TRIP to a fund member are 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 that since 1 July 2017, the 15% pension offset will continue to be available for TRIP payments to under-60s.
Note: Before July 2017, the special concessional cap of $35,000 applied to anyone aged 49 years or over on 30 June 2016 (for the 2016/2017 year), and was applicable to those eligible to commence or continue running a TRIP. The annual general concessional contributions cap, available to under-50s was $30,000 for the 2016/2017 year. Since 1 July 2017, the concessional contributions cap drops to $25,000 for all ages.
For example (pre-July 2017 rules): Joan was 62 and earnt $90,000 a year plus super. If she did nothing, her income tax bill would have been $21,247 plus 2% Medicare levy of $1800, taking the total tax take to $23,047 (for the 2016/2017 year). She decided to commence a typical TRIP strategy. She salary sacrificed $26,000 into super (her annual concessional cap was $35,000 and her employer contributed $8,550 in Superannuation Guarantee payments). She then received pension payments from her TRIP, which were tax-free so the pension payments don’t form part of her taxable income. Her taxable income was reduced to $64,000 and Joan’s pension income was tax-free. Joan’s income tax bill was 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 were subject to 15% contributions tax of $3,900. In summary, Joan saved at least $5,520 in total taxes (while boosting her super account by $22,100, after contributions tax was deducted). Potentially, if Joan ran a self-managed super fund, she could offset the 15% contributions tax by receiving franked dividends from Australian shares. Since 1 July 2017, Joan does not receive a tax exemption on the fund earnings derived from her TRIP assets, and she can only make concessional contributions of no more than $25,000 (including her employer’s SG contributions).
7. Not all super funds offer TRIPs.
Not all super funds offer transition-to-retirement pensions, and the likelihood of more super funds offering this option post-July 2017 is very slim. You will need to check with your current super fund whether they offer this super 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, and it is likely the trust deed will need to be amended based on the post-July 2017 change to the tax treatment of TRIPs.
9. Running a TRIP and contributing to a SMSF may no longer require segregation.
Before July 2017, if an individual ran his or her own SMSF and chose to salary sacrifice while taking a TRIP, then the SMSF trustees would have to either segregate the fund’s assets that finance the TRIP, or obtain an actuarial certificate. If a fund did not segregate pension assets from assets representing accumulation phase, then the SMSF trustees would then be required to obtain an actuarial certificate each year to identify the tax-exempt income derived from pension assets.
Note: Since1 July 2017, a TRIP is not considered to be in retirement phase, so segregating TRIP assets is no longer a requirement. The administration requirements for managing this transition may trigger capital gains tax issues in the future.
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, the ATO released some guidance on possible CGT relief (and updated this relief in late 2017): see the ATO Law Companion Guideline, LCG2016/8 Superannuation reform: transfer balance cap and transition to retirement transitional CGT relief for superannuation funds.
For background on the CGT relief rules, see also SuperGuide article CGT relief and the $1.6 million transfer balance cap, and TRIPs.
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.
For more information…
For more information on TRIPs, see the following SuperGuide articles: