As many readers will be aware, legally getting access to superannuation before retirement can be a rather difficult.
But, back in 2005 things were made just a little easier.
Superannuation law was amended to allow people to access their super from preservation age – currently 55, but progressively increasing to 60 – without having to retire. It became affectionately known as ‘transition to retirement’ but it actually has nothing to do with retiring.
Once a person reaches their preservation age, they are able to access their super even though they might continue to work on a part-time or even a full-time basis.
There are some restrictions that apply, including:
- Superannuation can only be accessed as an income stream or pension. That is, the amount of super being drawn cannot be paid out as a lump sum, however the annual income may be paid as a single annual instalment. The investment product that pays the pension is often referred to as a transition to retirement pension, or transition to retirement income stream (TRIS). Transition to retirement is affectionately abbreviated to ‘TTR’.
- The income that may be drawn each year is based on the TRIS account balance. The minimum income that can be drawn is 4% of the account balance, while the maximum is 10% of the account balance.
- During the life of a TRIS, lump sums cannot be withdrawn from the account, apart from the annualised annual income payment.
In the past, one of the attractions of a TRIS was that the investment earnings achieved by the super fund on the investments supporting the TRIS were exempt from tax at the super fund level. Because the super fund did not have to pay tax, this translated to a higher investment return for the investor.
Unfortunately, this concession was withdrawn for TRISs from 1 July 2017. They are now taxed on the same basis as a superannuation accumulation account. That is, fund earnings are taxed at a rate of 15%, with a 331/3% discount available for capital gains.
Once a person reaches the age of 60, the income they personally receive from their TRIS is tax free in their hands, even though their super fund is still paying tax on the underlying investment earnings.
One of the very popular strategies adopted in the past was for people to commence drawing income from their TRIS and simply enter into a salary sacrifice arrangement with their employer to forego part of their salary and have it contributed back to super. It was a highly tax advantaged strategy, particularly for high income earners when the superannuation contribution limits were much higher than they are today.
However, not all is lost.
Even though a TRIS does not offer the same tax advantages as it did in the past, they may still play an important part in personal financial planning.
Drawing income from TRIS, particularly if age over 60, may still provide some tax advantages when coupled with a salary sacrifice arrangement or making personal tax-deductible contributions. The general concept of transition to retirement is still relevant where an individual needs to supplement their existing income. This may occur when unexpected expenses arise, a job is lost, or a person chooses to reduce their working hours in order to ‘transition into retirement’ – the original intention for introducing transition to retirement.
Of course, transition to retirement has a downside – the earlier we start drawing down on our super, the greater the risk that we will outlive it.
If you think that transition to retirement is something you should be thinking about, make an appointment to speak with a financial planner who can provide all the details and assess its suitability for your circumstances.1