The Government’s ‘Transition to Retirement’ rules are designed to provide Australians with flexibility as they move from full-time work into retirement, by allowing access to preserved superannuation money to top-up their income. Other strategic opportunities are discussed in this fact sheet.
The key to this rule is that pre-retirees who are currently age 57 or over may be able to gain access to some or all of their accumulated superannuation balances through a non-commutable income stream. This is known as a Transition to Retirement Income Steam (TRIS).
A TRIS is basically an account-based pension (ABP) which uses preserved superannuation savings to pay you a regular and tax-effective income. The TRIS pays you a regular income comprised of interest and capital until your account runs out.
The minimum income you choose from a TRIS must be at least equal to 2 percent of the account balance as at commencement and then on 1 July each year.
The differences between a TRIS and normal account-based pension are:
Once you reach a full condition of release you can convert the TRIS into a normal account-based pension.
Lump sum tax is deferred when you transfer superannuation money to a TRIS. The income payments may be split between taxable and taxable components (depending on your superannuation components). The taxable component is taxed at your marginal tax rate, but with a 15 percent tax offset**.
Once you reach age 60, all withdrawals and income payments are tax-free***.
There are three main ways pre-retirees can benefit from a TRIS:
60-year-old Peter works full time. In addition to his salary of $100,000 his employer SG contributions are $9,500 per year. He can contribute an additional $15,500 to superannuation before tax and still be within his concessional contribution cap of $25,000****. Peter asks his employer to salary sacrifice $15,500 per year. Contributions tax of 15 percent is deducted leaving him $13,175 to invest in his superannuation fund. With income tax savings, Peter’s salary reduces by just $9,703, despite salary sacrificing $15,500.
Peter uses his superannuation to start a TRIS with $400,000. He draws the minimum of $16,000 from his TRIS to replace the reduced salary. But as this is more than he needs, he contributes $6,297 back into superannuation as a non-concessional contribution. Overall, his personal contributions into superannuation exceed the drawings by $3,472.
Note: the above example is based on the tax rates and thresholds for 2020/21 financial year.
This strategy has created a benefit through higher accumulation in superannuation. This is due to no tax on the pension income compared to marginal tax rates on salary. You should consult your tax adviser to discuss your individual situation.
To make this strategy work you can choose to either salary sacrifice or make personal deductible contributions to superannuation. It is important to note that employer superannuation contributions (superannuation guarantee), salary sacrifice and personal deductible contributions all count towards your concessional cap – currently $25,000iv per year.
* By definition of “transition to retirement income stream” in SIS Regulation 6.01
** ATO website – Transition to retirement income stream
*** ATO website – Schedule 13 – Tax table for super income stream
**** ATO website – concessional contributions cap
***** By definition of “preservation age” in SIS Regulation 6.01
This information has been produced by Australian Unity Personal Financial Services Ltd (‘AUPFS’) ABN 26 098 725 145, AFSL 234459. Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. It does not represent legal, tax, or personal advice and should not be relied on as such. You should obtain financial advice relevant to your circumstances before making investment decisions. Any reference to tax advice contained in this document is incidental to the general financial advice it may contain. You should seek specialist advice from a tax professional to confirm the impact of this advice on your overall tax position. Nothing in this document represents an offer or solicitation in relation to securities or investments in any jurisdiction. Where a particular financial product is mentioned, you should consider the Product Disclosure Statement before making any decisions in relation to the product and we make no guarantees regarding future performance or in relation to any particular outcome. Whilst every care has been taken in the preparation of this information, it may not remain current after the date of publication and AUPFS and its related bodies corporate make no representation as to its accuracy or completeness. Published: July 2020 © Copyright 2020