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 that were in place before July 2017 as well as TRIPs commenced on or after 1 July 2017.
Gone are the days when all Australians work to a certain age, and then the next day, they retire from the workforce. The end of work and the beginning of retirement is more fluid in recent times, and the rules that apply to accessing superannuation benefits reflect this blurring of what retirement means.
In 2005, a special type of super pension was introduced, known as a transition-to-retirement pension. By starting a transition-to-retirement pension (what we call a ‘TRIP’), you don’t have to retire to withdraw your super benefits. You can work part-time or full-time or even casually, and withdraw a portion of your super benefits each year.
Until 30 June 2017, the major selling point in starting a TRIP was that you could access the tax advantages associated with super pensions while you were still working. Tax advantages include tax-exempt earnings on assets financing the pension (this exemption was removed from 1 July 2017); and tax-free pension income for over 60s (which still applies beyond 30 June 2017). If you start a TRIP when you’re under the age of 60, then you can take advantage of the 15% pension offset on assessable pension income, and this 15% pension offset remains in place.
15% pension tax offset continues beyond 30 June 2017: Since July 2017, the earnings from assets supporting a transition to retirement income stream (TRIP) are no longer subject to an earnings tax exemption, that is, the earnings 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 TRIP benefit paid to an individual member. According to an ATO spokesperson, “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.”
Important: At the risk of repeating this key change to the TRIP rules, note that since 1 July 2017, the government has removed the tax exemption on earnings from assets financing a TRIP, that is, a TRIP is not considered a superannuation income stream in the retirement phase (although minimum pension payments must still be withdrawn each year).
Depending on the strategies an individual chooses to use, it is possible to reduce the amount of income tax that a person pays while boosting the super benefit. 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 benefit payments (if under 60).
Note that since 1 July 2017, the tax-effectiveness of such a strategy has been lessened due to the cut in the concessional contributions cap from $35,000 to $25,000, and the removal of the tax exemption on investment earnings derived from TRIP assets.
Before I take a TRIP, what’s the other catch?
If you’re considering starting a TRIP, note that you must have reached your preservation age – 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. If you were born after 30 June 1964, your preservation age is 60 years, and if you were born before July 1960, your preservation age is 55 years (for more information on your preservation age see SuperGuide article Accessing super: What is my preservation age? or check out SuperGuide’s Retirement Age Reckoner: Discover your preservation age and Age Pension age).
A TRIP is similar to other account-based pensions, except for three important differences:
- Since 1 July 2017, a TRIP is no longer considered a superannuation income stream in retirement phase and has lost the tax exemption on pension earnings.
- You can withdraw no more than 10% of your TRIP’s account balance each year as pension income.
- You cannot withdraw lump sums from your TRIP until you retire, or until you satisfy another condition of release, such as reaching the age of 65. You can partially commute a TRIP (that is, revert it to accumulation phase) which means that commutation is treated as a lump sum, but the minimum pension payments for the continuing TRIP still need to be met.
Reminder: Since 1 July 2017, TRIPs are no longer eligible for the tax exemption on pension asset earnings (15% earnings tax will apply), although pension benefit payments on or after the age of 60 will continue to be tax-free, and minimum payments must continue to be withdrawn from the TRIP.
What happens to my pre-July 2017 TRIP?
If you had a TRIP in place before July 2017, then you should have reviewed your circumstances to determine the impact of your TRIP no longer being considered a superannuation income stream in the 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, will 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, the ATO released some guidance on possible CGT relief (and released an updated guidance for comment until 27 October 2017): 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 (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.
For more information…
You can read more about TRIPs and how they work in the SuperGuide articles:
- Less tax, more super? A transition-to-retirement pension is no longer the answer
- TRIPs: 10 important facts about transition-to-retirement pensions
- Transition-to-retirement pensions (case studies): How does a TRIP work?
- Transition-to-retirement pension: Can I work full-time and what form do I fill in?