Transition to retirement Q&As: Part 2

There are restrictions imposed on the recipient spouse (the spouse who receives the benefits), under a contribution splitting arrangement, including:

• That the receiving spouse must be under preservation age, regardless of their work status; or
• Between their preservation age and age 65 and not yet retired.

Where someone is already accessing a TTR pension, then this indicates they would have already reached their preservation age. So based on this, the spouse would only be eligible to receive amounts under a contribution splitting arrangement if they had not yet retired.

Q: I have a transition-to-retirement pension and my employer still makes contributions to my fund. How do I add these contributions to my transition-to-retirement pension?

The super rules do not allow additional capital to be added to an existing pension, even amounts that have been received into the fund as contributions.

If a pension recipient wants to move accumulation benefits into retirement phase, then they have two options:

1. Stop the existing pension by rolling these amounts back to their accumulation account and then recommence a new, larger transition-to-retirement pension; or
2. Start a new, second transition-to-retirement pension with amounts held in accumulation. The member would then run two, or more, separate pensions in their super fund.

As always, check any fund specific requirement or the relevant SMSF trust deed.

Q: How can I determine if my SMSF allows members to access benefits through a transition-to-retirement pension?

The rules for each SMSF are set out in its trust deed. If you want to check if your fund allows TTR pensions, then you need to read your fund’s trust deed.

Your deed would usually have a section on “member benefit payments” or “pensions” where it should set out rules that are specific to transition-to-retirement pensions.

The following are examples of trust deed clauses allowing TTR pensions:

Example 1:

“The Trustee must pay transition-to-retirement pensions consistently and as defined in SIS Regulations (Regulation 6.01(2)). …..”

Example 2:

The Trustee must pay a pension benefit to a Beneficiary in the form of:

• A non-commutable account-based pension (transition to retirement)
• A defined benefit pension
• A market linked pension
• ….

Example 3:

The “XYZ Superannuation Fund” trust deed permits the trustees to pay any type of pension permissible under superannuation law.”

It would also be a good idea to check your trust deed for any fund specific rules or requirements around the establishment of a pension.

Q: Is it possible that TTR pensions will no longer be allowed in the future and result in existing pensions having to cease?

We are not aware of any existing plans by the Government, or the Opposition, to ban transition-to-retirement pensions or for any other changes to the TTR rules.

It is also worth noting that when legislative changes are proposed, there is usually a transitional period before those changes become law, to allow those affected to put in place any required change to comply with the new laws.

Q: Can I start a transition-to-retirement pension during the year, or do I need to wait until the following 1 July?

A TTR can be started at any time during the year, so long as the member has met the required condition of release, that is, “attaining preservation age”.

There is no need to wait until the start of the new financial year.

Where a TTR begins on a day other than 1 July, the minimum pension amount (4% of the pension starting balance), is prorated based on the number of days remaining in the financial year.

Q: What are the pro-rata rules for a transition-to-retirement pension?

As mentioned in the previoius question, the annual minimum pension is prorated where the pension commences on any day other than 1 July.

However, the 10% maximum that applies to transition-to-retirement pensions DOES NOT need to be prorated. Regardless of when a TTR pension commences, the member can access up to a maximum of 10% of the pension opening balance in the first year.

For example, if a member decides to start a pension on 1 May with $700,000, they would still be allowed to access up to $70,000 (10% of $700,00) in that first year.

Q: Is it still worthwhile starting a transition-to-retirement pension where the member balance is not large, for example a member balance around $500,000?

For some fund members, starting a TTR may not be an appropriate strategy. It really depends on the personal circumstances of the fund member.

It is important that super fund members consider seeking advice in situations where they are not sure what to do or where they want specific advice that relates to their personal position.

Where a member wants to supplement their income with a pension from their super fund, and they are not yet able to access their benefits any other way, then a TTR can be useful.

There may also be other reasons for a member to make use of the TTR strategies available, including a tax arbitrage strategy whereby the member makes salary-sacrificed contributions to super, and then supplements their income with tax-free pension payments from a TTR pension.

There are also other TTR strategies that could prove beneficial. Read more about currently available TTR strategies.

Q: Are the funds drawn from a TTR added to your taxable income for the FY along with other taxable income received?

This will depend on the member’s age.

Pension payments received before age 60 may be subject to tax, depending on the tax components that make up each pension payment. Keep in mind that pension payments are paid proportionately from the relevant tax components that make up the pension balance.

These tax components include:

• Tax-free component: These amounts come from your after-tax or your non-concessional contributions into your super account. Pension payments made from your tax-free component are received tax free; there is no tax payable on these amounts.
• Taxable component: These amounts come from your concessional (before-tax) contributions, including employer contributions, salary-sacrifice contributions and any personal super contributions for which you claimed a tax deduction. This component also includes all investment earnings related to your accumulation account.
  If you are under age 60, the taxable component of your pension payments is included in your assessable income and taxed at your marginal tax rate, but you receive a 15% tax offset.
  If you are 60 or older, the taxable component of your pension payments is received tax free.