In this edition of Ask Colley, Graeme Colley answers “I know there’s been changes to the Transition to Retirement Income Stream. If I’m a retiree of close to retirement age, what do I need to know?”
Q: I know there’s been changes to the Transition to Retirement Income Stream. If I’m a retiree of close to retirement age, what do I need to know?
A: If you’ve reached the preservation age of 57, need a little more to live on and saved a reasonable amount in superannuation, then a Transition to Retirement Income Stream (also known as a TRIS) could be right for you. The TRIS allows you access to preserved superannuation benefits as an income stream while you continue to work.
TRISs have been around since 2005 and were originally designed to allow you to transition into retirement by reducing work hours but allowing you to top up your income from super while receiving a reduced pay packet. However, very few TRISs were ever used as originally intended as there was no requirement to reduce work hours and you could offset the amount withdrawn from super by salary sacrificing or making tax deductible contributions to super. The real power from commencing a TRIS came from the income on fund investments supporting the TRIS, including capital gains, which were totally tax free.
With the changes to super from 1 July last year, the attraction of TRISs became tainted as the income on the investments supporting the TRIS became taxable. However, other positive features of a TRIS remain, and you can continue to salary sacrifice to super or make tax deductible contributions which are limited by the concessional contributions cap of $25,000. So, is it still viable to put a TRIS in place given the changes that have occurred. As always, this will depend on your circumstances because in some situations it will be worthwhile and in others it won’t.
Let’s look at a case study that illustrates the rules as they have applied from 1 July 2017. Joel is 57 and is employed as a tutor. He is thinking of starting a TRIS as he would like access to his preserved superannuation benefits but at the same time maintain his superannuation balance, if possible.
Joel decides to have concessional contributions of $25,000 made to superannuation from a combination of his employer’s superannuation guarantee contributions and personal deductible contributions. Joel earns about $110,000 p.a. and pays a personal tax rate of 39% including Medicare. His superannuation will increase by $21,250 p.a. after tax of 15% and the tax benefit from making these contributions will be a maximum of $9,750. This will result in a net tax benefit of $6,000, taking into account the tax paid by the fund of $3,750.
If Joel were to receive a TRIS of slightly over $20,000, the net amount after income tax and the 15% tax offset available he would receive is $15,250. This is the same after-tax amount had the contribution not been made to superannuation but paid to Joel as salary. Joel’s superannuation will increase by about $1,250 being the difference between the gross pension and the net amount credited to his accumulation account in the fund. Therefore, the amount Joel has in superannuation when he started the TRIS will be maintained and even slightly increased.
TRISs have a minimum and maximum amount that can be withdrawn each financial year. The minimum amount is equal to 4% of the superannuation balance which is pro rated on a daily basis if the TRIS is paid for only part of the year. There is a maximum limit which is equal to 10% of the account balance of the TRIS when it commences and each financial year thereafter. Once a person retires after preservation age or reaches 65, whatever is the earlier, the maximum pension limit no longer applies.
From 1 July 2017, the income on investments in the fund supporting Joel’s pension are taxed at 15%. This is a change from the previous rules where the income was tax exempt. The fund can offset any franking credits against its tax payable and, as the rules currently stand, the fund may even get a refund of excess franking credits.
One change that has occurred since the new rules commenced is the treatment of TRISs paid as death benefits. The death benefit rules for TRISs will only permit payment of an automatic death pension (reversionary pension) to a surviving dependant if the dependant has met some limited conditions. These conditions are retiring after preservation age, reaching 65, permanent disability and terminal illness. The government is proposing to change these rules to do away with this limitation which will be backdated to 1 July 2017. However, the legislation is yet to be debated in the parliament.
The answer to the question of whether a TRIS is still worthwhile from 1 July 2017 depends on your circumstances. If you are interested in accessing superannuation benefits early once you reach preservation age but continue to work, a TRIS could be for you.
While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.