Despite a pessimistic view by some, the reasons for having a transition to retirement income stream (TRIS) haven’t changed, it’s just that the investment income earned by the superannuation fund will be taxed at 15% from 1 July 2017. For many, that result is better than investing the same amount as an individual and being taxed at personal rates of up to 47% plus Medicare.

A TRIS provides many advantages, even after the changes to superannuation take place from 1 July 2017. The most important is probably access to preserved benefits, prior to meeting the ‘retirement’ condition of release. Then there’s the ability to receive a tax advantaged regular payment from superannuation and the concessional rate of tax on the balance held by the fund. In addition, a TRIS can be complemented with salary sacrifice arrangements for anyone who has met their preservation age, currently age 56. What’s not to like about that?

A TRIS is an income stream payable from a superannuation fund that has a number of restrictions placed on it, compared to an account-based income stream. A TRIS has the following features:

• The minimum amount of income paid under the TRIS must be no less than 4% of the account balance for the financial year. This is pro-rated on a daily basis if it commences or ends during the year.
• A cap equal to 10% of the account balance each financial year exists on the maximum amount that can be paid, however, it is not pro-rated.
• The amount of the TRIS, which is taxed in the hands of the individual, is eligible for a 15% tax offset.
• Once the pensioner reaches age 60, the TRIS is tax-free on receipt.
• When drawing down a TRIS, the non-preserved components are withdrawn first, before drawing preserved components.
• A prohibition exists on withdrawing preserved amounts as lump sums, however, non-preserved components can be withdrawn as lump sums any time.
• On the death of the pensioner, the amount left in the TRIS account can be paid as a reversionary income stream to dependants.
• A TRIS can be returned to the accumulation phase of super at any time, if required.
• A TRIS cannot be used as security for a loan.
• It is not possible to add contributions or rolled over benefits to the balance of a TRIS.

A comparison of the use of a TRIS before and after the commencement of the changes on 1 July 2017 shows that while there is a reduction of the amount available to provide the TRIS year by year, it still provides sound advantages. This can be illustrated in the case study of Natasha.

Case Study

Natasha is 57 and plans to work full-time until she is 65. She commences a TRIS on 1 July 2017 with the preserved component of her superannuation balance of $800,000. The minimum TRIS will be $32,000 and the maximum will be $80,000. A long-term earnings rate is 7.1% p.a. before tax has been used (ASFA annual study of long-term returns published in Super Funds magazine, September 2016 – the 20-year rolling rate of return is 7.1%).

The impact of paying tax on the income earned on investments that support the TRIS over the eight years that Natasha plans to receive the income stream is $93,944. This will include the reduction in the balance year-by-year to take into account the lower carry forward balance and the lower amount of minimum pension that can be withdrawn from the fund.

The amount accumulated in the fund after eight years would be $1,052,975, if no tax was payable by the fund, and $959,031 if 15% tax was payable by the fund.

While the amount of tax payable by the fund does make a difference in the balance available to pay the TRIS year-by-year it may provide a better alternative than investing the $800,000 in the name of the individual. If they were able to earn 7.1% long-term on the balance ($56,800 p.a.) the amount of tax payable would be $10,007 (excluding Medicare and other tax offsets) for the 2017-18 financial year, compared to $8,520 payable by the fund on the same amount of income.

Commencing a TRIS from 1 July 2017 will continue to have advantages. It will provide access to preserved benefits, a regular income stream that is tax effective and concessional rates on the tax payable by the superannuation fund.

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.