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Transition to retirement income stream

There are strict laws and regulations preventing a person from accessing their superannuation contributions before retirement. However, there are special exemptions that exist for people who wish to ease into retirement earlier.

Once an employee reaches preservation age, they may commence a transition to retirement (TTR) phase and receive supplemental income by way of a TTR income stream (TRIS).

TRIS allows eligible workers to access a portion of their super contributions as tax-free income stream without retiring.

Learn more about TRIS and how recent the regulatory changes affect people in the TTR phase.

TRIS eligibility

Employees who are close to retirement may opt to enter into a transition to retirement phase and receive a limited pension income from their superannuation fund or self-managed super fund (SMSF).

There’s only one requirement to qualify for TRIS: reaching preservation age. However, factors such as the individual’s age, the type of super they have and their current account balance may affect the amount of income they receive.

Preservation age
Simply reaching preservation age already makes an individual eligible for the TTR phase.

The rule states that anyone born before July 1, 1960 reaches their preservation age at 55 years old. From July 1, 1960 until June 30, 1961, the preservation age becomes 56, and another year is added for every succeeding July 1 to June 30 interval until 1964.

Anyone born on July 1, 1964 and onwards has a preservation age of 60 years old.

They must also not have full access to their super, which means they must neither be retired nor receive pension from their super—TRIS is a transition to retirement income, after all.

However, simply being eligible does not mean TRIS is even an option a person can take. Determining this would depend on the two things below.

Type of super fund
Not all superannuation funds can accommodate a TRIS scheme. Call up the fund manager first to confirm if the option is available for its members.

  • Defined benefit super: Members of defined benefit funds don’t have a TRIS option—unless they take their contributions and deposit them in an accumulation fund. Most experts, however, don’t recommend doing this because defined benefit accounts are usually more generous in retirement.
  • Accumulation account: Most accumulation funds may arrange for a TRIS, but the best way to know for sure is to contact the fund manager. Some fund managers do not offer TTR schemes, which means a member will have to search for another fund manager that does to open a TRIS account with them.
  • SMSF: For an SMSF to release money in the form of a TRIS, the trust deed must explicitly state that such a scheme is allowed. If the SMSF does not indicate this option in the trust deed, the trustees would have to work out a way to allocate funds and open a TRIS pension account for its member or wind up. Doing otherwise may flag the fund as non-complying, and the trustees could be charged hefty fines and taxes.

Enough contributions
It goes without saying that a member should have enough contributions in their accumulation account to open a TTR account. After all, that is where the money for TRIS will come from.

They must also leave enough money in the accumulation account to keep it open because that is still where all contributions will be deposited. This is because a TTR account is only supposed to receive money from the accumulation fund or as earnings from the underlying assets.

TRIS conditions

There are a few important things about TRIS accounts that pre-retirees need to understand because it can affect their retirement money.

TRIS decreases retirement savings
Since funding for the TRIS account is taken from the super fund or SMSF contributions, it’s already a given that it will decrease funding during the actual retirement years. There’s always the option to salary sacrifice a higher percentage of pre-tax wage to the accumulation fund, but its potential to earn back what was taken will depend on the underlying investments.

There’s also the decreased contributions cap of $25,000, which already includes the employer guarantee amount. Unless they have a reasonable strategy to bring the balance back to pre-TRIS amount, it may prove difficult to achieve.

Withdrawal limits
TRIS requires pensioners to withdraw a portion of the TTR account’s balance annually. People under 65 years old must withdraw at least 4 per cent but may not exceed 10 per cent of the account’s total balance.

The minimum amount for withdrawal is calculated annually and depends on the TRIS pensioner’s remaining balance and their age. The account holder is also strictly prohibited from withdrawing a lump sum amount from their fund.

What this means is that individuals who are considering a TRIS may not receive the amount they expected to because of the withdrawal limitations. Likewise, they may outlive their retirement savings because of the amount taken out for TRIS.

To TRIS or not to TRIS

Many eligible individuals previously turned to TRIS either for supplemental income or simply to take advantage of its tax exempt status. However, changes in the super laws beginning July 1, 2017 removed the tax exemption of income earned from assets in TTR pension accounts.

Prior to July 1, 2017, individuals who opened a TTR account and received TRIS enjoyed a tax-free environment both with their earnings and income. This allowed them to make additional super contributions while saving on income tax.

After the new rule was implemented, fund managers were required to report all TTR account earnings, and the account owner must pay 15 per cent tax on them.

There were no changes in TRIS taxation, which means pension payments will remain tax-free for those who are over 60 years old. For those younger than 60 years, income is taxed at their marginal tax rate with an applicable 15 per cent offset.

While these may sound great, there may be negative implications on other retirement income sources and benefits, such as the age pension.

It’s best for those concerned to discuss their specific circumstance with a financial advisor if TRIS is the best pre-retirement option for their situation.

This information has been sourced from the Australian Taxation Office and ASIC’s Moneysmart.

Transition to retirement income stream
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Anonymous - Why does this get all the media attention when in reality it affects very few and the charges are minimal? How about reporting on all the ISA TPD.......
Anonymous - This got to be the smartest comment this century ?!....
nan - So what do you do if you are being ripped of and then can't afford the body corporate fees....
MarkL - The banks may not charge dead people any more ........... but they won't charge them any less either!....