Sunday 01 April 2018
Transition to retirement pensions
Sunday 01 April 2018
What are they?
A transition to retirement (TTR) pension is a type of account based pension offered by many super funds under a specific condition of release. This condition of release allows a member who has reached preservation age to access preserved super benefits, regardless of their work status, but only using a TTR pension.
TTR pensions are subject to restrictions that limit the annual income the member can draw from the pension and generally prevent commutation to cash a lump sum. These restrictions apply until the member meets a full condition of release (eg retirement or turning 65).
What is the tax treatment?
The tax treatment of payments from TTR pensions is the same as for regular account based pensions. However, the treatment of fund earnings is different.
From 1 July 2017, the fund earnings on assets supporting TTR pensions are taxable in the same way as accumulation phase assets. Once the pension is in the retirement phase, the earnings will become tax free. The pension will be in the retirement phase once the member reaches age 65 or notifies their fund that they have met one of the following conditions of release:
- terminal medical condition; or
- permanent incapacity.
From that time, the pension will also count towards the member’s transfer balance cap. This is a limit that applies to the amount of an individual’s accumulated superannuation that can be transferred into a retirement phase pension account over the course of an individual’s lifetime. Penalties may apply if this limit is exceeded. For more information, see the ATO’s guidance on Transfer balance cap and LCR 2016/9.
What are the benefits of TTR pensions?
TTR pensions were introduced to provide flexibility for people who want to gradually transition towards full retirement. Income from a TTR pension can supplement a member’s work income which may allow them to reduce work hours while maintaining a similar level of overall income.
Prior to 1 July 2017, they could also allow members to take advantage of tax-effective pension income and pension fund earnings while contributing to super. However, the introduction of tax on TTR pension earnings coupled with a decrease in concessional contribution caps has reduced the appeal of this strategy.
What are the annual income limits?
The minimum income limit is 4 per cent of the account balance as calculated on 1 July each income year or on the commencement date in the first income year.
In the first income year the minimum payment is pro-rated based on the days remaining in the income year that follow the commencement date.
The maximum income limit is 10 per cent of the account balance as calculated on 1 July each income year or on the commencement date in the first income year.
In the first income year there is no requirement to pro-rate the maximum limit (unlike minimum payments). This means that a member can receive the full 10 per cent maximum, regardless of how far into the year they commence the pension.
Can a TTR pension be commuted?
TTR pensions are generally non-commutable. Exceptions to this rule allow commutation where:
- funds are transferred back to accumulation phase or rolled over to another super fund
- the purpose is to:
- cash an unrestricted non-preserved (UNP) benefit
- pay a contributions surcharge
- give effect to a family law payment split, or
- give effect to a release authorities relating to excess contributions or Division 293 tax.
- a full condition of release is met in which case the pension can be commuted at any time.
What if a member has some non-preserved benefits?
Where a member has a combination of preserved benefits and unrestricted or restricted non-preserved benefits, amounts paid from a TTR pension are required to be cashed in the following order:
- first, from UNP benefits
- second, from restricted non-preserved benefits, and
- third, from preserved benefits.
As noted above, if the member has UNP benefits, they are able to partially commute the income stream in order to cash those benefits. The resulting payment will be taxed as a superannuation lump sum and does not count towards the minimum annual payment requirement.
What are UNP benefits?
UNP benefits are not subject to preservation requirements and conditions of release. UNP benefits may be withdrawn from the fund at any time (subject to the fund’s rules).
UNP benefits may include:
- benefits left in the fund after a member has satisfied the fund that they met a full condition of release, and
- benefits that represent employer eligible termination payments rolled over before 1 July 2004.
What is a member’s preservation age?
A member’s preservation age depends on when they were born.
|Date of birth||Preservation age|
|Before 1 July 1960||55|
|1 July 1960 – 30 June 1961||56|
|1 July 1961 – 30 June 1962||57|
|1 July 1962 – 30 June 1963||58|
|1 July 1963 – 30 June 1964||59|
|1 July 1964 and after||60|
Macquarie Big Black Book: Superannuation pension phase section
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