Implementing a transition-to-retirement income stream can be advantageous, both from a lifestyle perspective and an income standpoint, writes Julie Dolan.
Have you reached your preservation age? Would you like to have access to your superannuation without having to retire or maybe you would like to start reducing your work hours without affecting your net cash flow? Alternatively, you may want to look at salary sacrificing more of your pre-tax salary to increase your superannuation while also not affecting your net personal cash flow. Therefore, you may want to consider commencing a transition-to-retirement income stream (TRIS).
What is a TRIS?
A TRIS is a specific type of income stream (many characteristics of an account-based pension) that can be commenced once you reach your preservation age. Your preservation age is the age at which you can access your preserved superannuation benefits without satisfying another condition of release. If you were born before 1 July 1960, your preservation age is 55. Your preservation age is higher if you were born after this date. The other important characteristics of a TRIS that must be complied with are as follows:
• Allowable under the current trust deed of the fund.
• Payment of a regular income stream for at least the minimum legislative prescribed amount each year. The minimum percentages are based on your age at the beginning of each financial year or the date of commencement of the pension and are as follows (2016 financial year):
| Item | Age of beneficiary | Percentage factor |
| 1 | Under 65 | 4 |
| 2 | 65-74 | 5 |
| 3 | 75-79 | 6 |
| 4 | 80-84 | 7 |
| 5 | 85-89 | 9 |
| 6 | 90-94 | 11 |
| 7 | 95 or over | 14 |
This percentage factor is multiplied against your member account backing the pension at the start of each financial year or the commencement date of the pension.
There is a 10 per cent maximum limit. The total payments made in a year must not exceed 10 per cent of the account balance on the commencement of a TRIS for the year it starts or on 1 July for each subsequent year. However, this rule ceases when you satisfy another condition of release, such as permanent retirement or reaching the age of 65.
Taxation of the pension payments. Depending on your age on receipt of the payments, you may need to pay tax at your marginal tax rates on the taxable component of the payments. A 15 per cent offset is then available. If you are over the age of 60, the pension is completely tax free and does not need to even be included in your tax return. The income generated on the assets backing the TRIS is tax free to the fund. This includes realised capital gains.
Once started, you cannot add further capital to the TRIS, rather you would need to start an additional one or roll back the existing one and restart it with the additional capital.
Put in place an investment strategy for the assets backing the TRIS so that there is sufficient liquidity to at least pay the annual minimum pension payments.
How does it work?
Let’s look at a simple case study.
Marie has just turned 56 and would like to start cutting back on her work so she can spend more time with her family and take a few trips away. She has decided to drop back to part-time employment. However, based on her living expenses and the amount she will receive on a part-time level, she will require an additional $15,000 a year. She has heard she may be able to access her superannuation account to top up the difference and hence would like to explore this option further.
Marie has reached her preservation age, but has not yet satisfied a condition of release to have full access to her superannuation, such as permanent retirement or reaching the age of 65. However, she can start a TRIS with part or all of her superannuation account within her SMSF. Marie currently has $350,000 in her fund.
If she places her whole superannuation member balance into a TRIS, the minimum annual pension payment she would be required to take out (based on a full year) would be:
• 4% x $400,000 = $16,000.
The maximum amount she cannot exceed would be:
• 10% x $400,000 = $40,000
As Marie is under 60, the taxable component of the pension payments would be assessable based on her marginal tax rate with a 15 per cent tax offset.
Therefore, depending on how much she would like to draw out and the net tax on the pension payments, she can effectively reduce her workload while not being disadvantaged from a cash-flow perspective. It allows her to comfortably transition to retirement based on her own needs and circumstances.
