Transition To Retirement

transition-to-retirement-pension As the term suggests, the transition-to-retirement (“TRIS”) rules enable access to superannuation before retirement or before turning 65, through the drawing of an income stream while still working.

Transition-to-retirement pensions can be commenced in the period between preservation age (which is 55 years or later depending on date of birth – see table below) and the time of retirement or turning 65 years. Retirement is the cessation of employment.

If aged 65 or more, or under 65 and over preservation age and retired, the transition-to-retirement rules do not apply,  but an account based pension can be drawn.

Preservation age based on date of birth
 Date of birthPreservation age
Before 1 July 196055
1 July 1960 to 30 June 196156
1 July 1961 to 30 June 196257
1 July 1962 to 30 June 196358
1 July 1963 to 30 June 196459
After 30 June 196460

Up to 30 June 2017, super fund earnings on the assets used to finance the pension were tax free, provided the pension was drawn as a ‘Transition to Retirement Non-Commutable Income Stream’.

‘Non-commutable’ means that the pension entitlement cannot be drawn as a lump sum payment (unless some other condition of release is met – such as retirement or turning 65 years).

From 1 July 2017 this concession has been removed.

Tax free earnings for TRIS funds removed from 1 July 2017

From 1 July 2017, the tax-exempt status of earnings from assets that support a transition-to-retirement income stream (pension) has been removed. Earnings from assets supporting a TRIS will therefore be taxed at 15% regardless of the date the TRIS commenced. See further explanation and guidance links here.

Up to 30 June 2017 it was also possible to elect to treat payments from a super income stream as a super lump sum for tax purposes. Super lump sums up to the low rate cap were tax-free. This concession is removed from 1 July 2017.

Additionally, from 1 July 2017, all commutations, including partial commutations, do not count towards the minimum annual pension payment requirement for super income streams. There is more information about these new rules here.

Transition to retirement pension fund tax ratesUp to 30 June  2017From 1 July 2017
Income0%15%
Capital gains on assets owned less than 12 months0%15%
Capital gains on assets owned 12 months or more0%10%

Tax on pension drawings from a TRIS fund

Tax changes from 1 July 2017 are applicable to the super fund earnings (as above). There has been no change to the tax rate on TRIS pension drawings.

Individual’s income tax on TRIS pensionsTax ratePension rebate
From preservation age to 59 – tax free component0%n/a
From preservation age to 59 – taxable componentMarginal rate15%
Age 60 and over0%n/a

Until age 60, the pension is included in taxable income less a 15% tax offset. From the age of 60 the pension becomes tax free.

The payment of any tax-free component – such as contributions for which no tax deduction has been claimed – remains tax-free whenever withdrawn (subject to the preservation rules).

The proportion of taxable and tax-free components in a pension payment must reflect the same proportion as those components in the super fund.

Minimum and maximum withdrawals

The annual minimum payment is calculated as at 1 July for each financial year.

Each financial year a maximum of 10% of the super fund may be drawn from a TRIS account.

Minimum drawings for under 65 years old is 4%.

The calculation of minimum/maximum pension is made by multiplying the specified percentage by the fund balance at the beginning of the financial year (1 July).

Simultaneous accumulation

While still working during the transition phase, super contributions including super guarantee and salary sacrifice can still be accumulating on the normal basis. With this strategy being followed in the crucial years from preservation age to retirement, the combined low tax and investment accumulation effects can considerably boost the value of an individual’s superannuation assets.

Moving to retirement phase

After 30 June 2017, once a member has retired or turned 65, the fund will enter the retirement phase and therefore become non-taxable.

It will also therefore be subject to the transfer balance cap rules, and account-based pension drawing limits.

Certain capital gains consequences associated with introduction of the transfer balance cap rules are subject to transitional relief, which operate to re-set asset values to current value so as to preserve historical tax-free capital gains. For further explanation see  Law Companion Guideline LCG 2016/8.

This is not advice. Please seek professional assistance before taking action.

Further information

 

.

This page was last modified 2019-07-03