Transition-to-retirement income stream (TRIS) pensions have been overlooked in recent years, but they still offer a head start on recontribution strategies that are only available within an SMSF, according to a technical expert.
Heffron managing director Meg Heffron said TRIS pensions have become a ”forgotten hero”, but were useful for people aged 60 and over who wanted to start a recontribution strategy while they were still working.
“Could we use a TRIS to get a bit of a head start and do it now while we can? The transactions look slightly complicated and I’ve made them that way to highlight how easy it would be in an SMSF,” Heffron said during a presentation at the recent ASF Audits Technical Seminar in Adelaide.
To illustrate how a TRIS could be used, she gave the example of a full-time worker who has turned 60 and is still receiving concessional contributions but cannot consider a retirement-phase pension because they are ineligible.
“If we wait till June, we can start a TRIS pension with their whole balance, let’s say it’s around $1.9 million, and we can take up to 10 per cent of the balance.
“If we take out as much as we can, which in this case would be $190,000 and do our recontribution, we’ll put $110,000 back in.
“This set of transactions so far would keep this person below $1.9 million and we’ll be able to put non-concessional contributions (NCC) in next year.
“We’ll hold on to the rest [of the $190,000 withdrawn] and early in the new financial year we’ll take some more to give us another $110,000 and put that back in as well and start a pension with the combined amount.
“We have effectively turned $220,0000 from taxable into tax free and have a 100 per cent tax-free pension sitting there waiting for next year. We could rinse and repeat each year, being very careful about how preservation is going to work during that period.”
She noted the transfer balance cap (TBC) was also not an issue because the withdrawal was used to start the TRIS, not a retirement-phase pension.
“If we’re going to take a pension payment out and put it back in and start another pension, you would normally never do that as it going to muck up the TBC, but we don’t have a TBC yet because they are only relevant for working out whether you can make non-concessional contributions in the following year,” she said.
“All this is easy in an SMSF because the timing is completely in the trustee’s control. They wait until all the concessional contributions are in, start the pension, take some money out, then put it straight back in.
“Imagine doing that if you had to fill in forms and give the money to someone else? You would never have the confidence that it was all going to happen in time, but in an SMSF it’s really easy.”
