- All pensions have a minimum income requirement based on your age.
- TTR pensions also have a maximum income rule.
- Stopping and starting another TTR pension to get the maximum income is a complex strategy for which you should seek specialist advice.
Transition to Retirement Pensions (TTR) have been in the media again this past week, primarily about minimum and maximum income amounts.
These pensions are potentially very attractive as they might enable you to reduce salary and make super contributions whilst receiving pension income that is paid with a rebate (if aged between 55 but under 60) or tax-free if aged at least 60.
The current media coverage about these pensions, often called TTR pensions in the super industry, is about taking lump sums out of a pension.
Minimum pension income rules
All pensions have a minimum income requirement based on your age each 1 July.
For example if you’re aged at least 65 but under 75 then your pension must pay you at least 5% of the market value of the assets (determined at the start of each financial year).
You can meet this minimum income payment by making small lump sum withdrawals from your pension. Technically these are called partial commutations and are only allowed if the rules governing your pension permit these payments.
In most cases you can’t take small lump sum payments from a TTR pension because most of your super money will be deemed to be “preserved” and can only be paid as a lump sum when you satisfy a Condition of Release.
However for TTR pensions it’s possible, but rare, that some of your money might be classed as a preservation component known as an unrestricted component. Any money in this component can be paid as a lump sum at any time even if you’re still working. If your TTR pension contains money in this preservation component then you can take it as a lump sum and that payment can be used to satisfy the minimum income requirement.
Non-TTR pension maximum income rule
For all non-TTR pensions there is no maximum income payment that can be paid. This means you could pay the whole pension account balance out as income in one amount.
TTR pensions unique payment requirements
For TTR pensions, the maximum pension income that can be paid each financial year is 10% of the market value of the fund on 1 July.
This 10% maximum pension rule also applies in the year the TTR pension commences. For example if your pension commenced on 1 January the maximum 10% income rule applies in the period of time between the date the pension was commenced and the end of the pension’s first financial year (ie it is not pro-rated).
This is a different rule than that applying to the minimum income formula, which is pro-rated for the period of time between the pension’s commencement date and the end of the financial year. If you start your pension six months into the financial year, the minimum income that has to be paid in that first financial year would be 2% of the market value of assets on that date (the normal minimum income amount is 4%).
An important point to note is that any lump sums paid from your TTR pension aren’t used to satisfy this maximum income rule. Technically this means you could get more money out of these pensions if necessary if your TTR pension has some Unpreserved Component.
Playing tricks with the maximum income rule
You often see strategies that involve commencing a TTR pension taking the maximum 10% allowed as income payments, then stopping that pension and commencing a new TTR pension that can be used to receive another 10% maximum income payment.
Typically this strategy is suggested for people who have a need for money and their superannuation represents the easiest source of funds.
In my view this strategy potentially has a number of barnacles from a tax and super law perspective. You could be seen to be illegally withdrawing preserved money from your super fund and face high tax penalties.
In addition if you run an SMSF then the ATO might consider that you’re not running your SMSF appropriately which might lead to additional penalties. If you’re interested in using this strategy then I suggest that you should seek robust advice from a superannuation lawyer or the ATO before proceeding.
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.