Are transition to retirement income streams still worthwhile?

Executive Manager, SMSF Technical & Private Wealth, SuperConcepts
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Transition to retirement income streams (TRIS) have been around for nearly 10 years and have proved to be a very useful complement to retirement savings. However, the changes to super, which take place from 1 July this year, raise questions as to whether they continue to be worthwhile. On balance, the conclusion is that, without doubt, they can have a very useful role in anyone’s retirement phase strategy.

The original purpose of a TRIS was to allow someone to commence receiving an income stream in the lead up to retirement. At the same time, it allowed a person to reduce their working hours but maintain desired income levels. This was watered down in reality as the legislation allowed anyone who had reached preservation age to draw a TRIS irrespective of their work status. The TRIS was taxed on its taxable component at personal rates less a 15% tax offset when received prior to 60 and tax-free from that age. In addition, the TRIS could be complemented by using salary sacrifice strategies, which would provide a marginal tax benefit overall. However, the greatest benefit of having a TRIS was that it allowed the transfer of investments from the taxable section of the super fund (accumulation phase) to the tax exempt section (pension phase).

The changes from 1 July this year require that the income on investments supporting a TRIS will be taxed at 15%, which reins in the main advantage of maintaining the TRIS. While this is a simple change, it does have a reasonably significant tax impact.

Now let’s look at the advantages of having a TRIS that will remain, but may have been overlooked because of the focus on other parts of the super reform legislation.

To satisfy the requirements of a TRIS, the pensioner:

  • must have met their preservation age, currently age 56;
  • can drawdown TRIS equal to at least 4% of the account balance of the TRIS at commencement or on 1 July in each subsequent year;
  • can receive a pro rata amount of the TRIS calculated on a daily basis where it is paid for part of the year;
  • cannot withdraw more than 10% of the TRIS in any year, which is not pro rated;
  • can return the TRIS to accumulation phase if required; and
  • cannot withdraw preserved components from the TRIS as lump sums.

This provides flexibility for anyone wishing to draw down their super by allowing access to preserved benefits at a time when they may not be ‘retired’ for purposes of the super legislation.

Another benefit of a TRIS, which may be overlooked, is its tax position for death benefit payments to non-dependants, compared to the situation if the same amount had remained in accumulation phase. The tax payable on the taxable component of the death benefit received by a non-dependant is 15% plus Medicare. A non-dependant is generally a child of the deceased who is at least 18.

Let’s look at a case study to illustrate the comparison. Marcia has a choice of starting a TRIS with her superannuation balance of $500,000 which consists of a taxable component of $300,000 and a tax-free component of $200,000. At the time the TRIS begins a calculation is made to determine the taxable and tax-free proportions of the TRIS. These proportions are used to work out the taxable and tax-free proportions of any pension or lump sum payments that are made from the TRIS.

If Marcia decided to leave the amount in accumulation phase, the calculation of the taxable and tax-free payments would not be calculated until a payment was actually made from the fund.

Let’s assume Marcia passes away. At the time of her death, the balance had grown to $800,000 depending on whether she had started the TRIS or had left the amount in accumulation phase. If the $800,000 was paid to her non-dependant son, Joel, the taxable component of the amount received would differ, depending on whether it was paid from the TRIS or the amount in accumulation phase.

If the amount due to Marcia’s TRIS was being paid to Joel, the taxable portion would be based on the same proportions at the time it commenced. Therefore, tax would be payable by Joel on 60% of $800,000, which is $480,000 and $320,000 would be tax-free. However, if Marcia had decided to leave the amount in accumulation phase, the taxable proportion would be determined at the time of her death. The amount would be the balance of Marcia’s superannuation in accumulation phase less the amount of her tax-free component which is set at $200,000. This means that Joel would end up paying tax on $600,000 if the death benefit was paid from accumulation phase. In these circumstances, the advantage of commencing a TRIS does provide some tax benefits on the death of the member.

The superannuation changes that impact on TRISs from 1 July 2017 will continue to provide an advantage to anyone who wishes to draw down superannuation after they have reached preservation age. Not only will it allow access to preserved superannuation benefits, it may also provide tax benefits on the pensioner’s death, if lump sums are paid to non-dependants.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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