What is a Transition to Retirement Pension?
Superannuation has two distinct phases. The first phase occurs prior to retirement or another condition of release being met, and is called the ‘accumulation’ phase. During this phase your fund is added to and grows (accumulates) during your working years. Once you retire or another condition of release is met, the ‘drawdown’ (or ‘pension’) phase commences and this is where you start to access your superannuation as a pension.
The drawdown phase provides a distinct advantage because income earned within the fund becomes tax free, as opposed to the regular 15% tax which applies during the accumulation phase. Account Based Pensions have this tax-free status. These occur when a member is age 65 or age 56-64 and has either retired or met another condition of release. In addition, pensions started when the member is still working and aged 56-64, called Transition to Retirement Pensions (TTRs), also have this tax-free status.
Starting a TTR pension during the ages of 56-64 while still working has become a common strategy adopted by fund members predominantly to benefit from the tax-free status of the earnings. However, when TTR pensions lose this benefit from 1 July 2017, income will be taxed at 15% from this date, in line with the accumulation phase. That being the case, what should you do with your TTR?
There are a number of options you can consider and on which you should seek appropriate advice.
Option 1. Retire (or meet another condition of release)
If you retire, your fund becomes a regular Account Based Pension and therefore the earnings retain tax-free status.
Option 2. Roll your TTR back to Accumulation phase
Alternatively, you may want to stop the unnecessary draw down of your super without the attendant tax benefits. This can be achieved by simply rolling the fund back to accumulation phase.
Option 3. Retain your TTR
If you retain your TTR, the income earned will be subject to tax as noted above. This ‘do nothing’ approach of retaining the TTR is the simplest approach. It may be appropriate where it will, for example:
- help you supplement your income while reducing your working hours; or
- provide scope to allow you to salary sacrifice to superannuation (allowing you to contribute more to superannuation but from your pre-tax income) and benefit from tax benefits that way.
However, there is a more complex matter you may need to consider, and that is any unrealised capital gains on the investments within your TTR. Each of the above options may have a different impact on what happens to the unrealised gains, and these outcomes are complex matters requiring specialist advice.
We note the above options do not take into consideration any interaction with the newly introduced $1.6 million balance transfer cap. If you are also affected by the balance transfer cap, you should seek additional advice on the implications of the cap for your TTR and the various options available to you.
Determining the outcome of your preferred strategy will take time and may require a rethink of your intended approach. You should, therefore, ensure you seek timely advice in order that the appropriate strategies can be considered, evaluated and put in place prior to 1 July 2017.