Written by Tracey Scotchbrook, Policy Manager, SMSF Association
First published in Your Money (The West Australian) on 1 November 2021. Licensed by Copyright Agency.
The pathway to retirement is varied.
It only depends on whether you are financially ready, but if you are mentally ready to step away from working life. But once the decision is made, it’s important to know your superannuation can play a role in your transition to retirement, even if you have not retired.
Although they don’t benefit from the same tax concessions as account-based pensions in retirement, transition-to-retirement pensions are a valuable tool in the right circumstances.
What are they?
TTR pensions are designed to help top up the income of people shifting from full-tine work to retirement. For some, this will be gradual as their working hours or days reduce over time.
They are limited to people who have reached their preservation age. This is the age you can first access your super and depends on when you were born.
A minimum pension payment of 4 per cent of the opening pension account balance must be taken each year. This rate is reduced by half for this financial year due to COVID-19.
Importantly, a maximum pension payment limit of 10 per cent a year applies, the pension must be paid in cash and no lump sum benefits are permitted.
Payments that do not comply may instead be classed as early access payments and penalties and additional tax may apply.
If you are aged 60 or over, your TTR pension payments are exempt from personal income tax. If you are under 60, any taxable portion of your pension payments will be taxed at your marginal tax rate, reduced by a 15 per cent tax offset.
If you are under 65, and have not retired, your TTR pension does not count towards your transfer balance cap. This means there is no limit on the amount you can hold in a TTR pension.
They can play a role in your pre-retirement and estate planning strategies.
Quarantine tax-free contributions: A TTR pension is a separate member account and allows for more than one pension account to be created within your SMSF. While no accumulation account is present, any tax-free contributions made to the fund, such as non-concessional or small business capital gains tax contributions, can be isolated and then placed into a new tax-free pension.
Recontribution strategy: Under a traditional recontribution strategy, pension amounts withdrawn are recontributed back into the SMSF as a tax-free non-concessional contribution. This refreshes taxable or substantially taxable components with drawn to tax-free amounts when contributed back into the fund. A new TTR pension can be started, securing the tax-free status of the contribution. However, with any contribution strategy, it’s important to ensure amounts you contribute do not exceed your contribution caps.
Both of the above strategies are useful in minimising the tax payable by adult children on any death benefits they may receive. They also provide a level of protection against any future policy changes to the taxation treatment of pensions.
Equalisation of member accounts: TTR pensions can also be used to equalise member accounts. This can be beneficial for those who may be close to or over $1.7 million while their spouse has a smaller balance.
Shifting amounts from one spouse to another allows for greater tax efficiency in the fund and maximises the use of both pension transfer balance caps on retirement. Equalisation can also assist in allowing greater amounts to be retained in the superannuation environment on the death of a spouse.
Like the recontribution strategy, the pension is used to withdraw cash from one member account. Subject to the contribution caps, the proceeds are then re-contributed to their spouse’s super account.
Before you retire
Careful planning is essential before retiring or turning 65. At that time, the TTR pension will become a retirement phase pension. It will count towards your transfer balance cap and is reportable to the ATO.
Penalties apply on amounts more than the cap.
A TTR pension in retirement phase will, however, result in the income from assets supporting the pension to become tax free from that point in time onwards. The maximum pension payment cap of 10 per cent is also removed.
While TTR pensions have their benefits, it is important that you seek advice from a qualified specialist adviser, to determine if this is right strategy.