Transition to retirement pensions
Since 2005 the government has allowed people to access their super if they are still working after the age of 55. They call this a Transition to Retirement Pension (TTRP). The concept of allowing people to access their super at this age was to encourage people to stay in the work force but at the same time allow them to reduce their working hours and replace that lost income with income from their superannuation.
An added benefit of being able to access your super at 55 is the opportunity to save tax and increase your super for retirement. If you start a TTRP at 55 the following applies:
- A new account (pension account) within your superannuation fund is created.
- You can choose the amount you place in this pension account but it must come from an existing super fund in your name.
- At least once during the financial year you must draw a minimum of 3% (reduced from 4% for 2012/2013) of the account balance and no more than 10%.
- Each subsequent year the balance in your pension account on 1st July determines to the minimum and maximum amount to be drawn for that year.
- Most super funds will allow you to draw this amount on a monthly or even fortnightly basis.
- You can stop your pension account at any time provided you have drawn the minimum amount for that financial year. If you stop your pension the balance is transferred back into your original account or can be rolled into another super fund.
- You cannot draw a lump sum from your pension account. If you elect to draw the minimum or maximum from your pension in one payment it is not treated as a lump sum.
- You cannot make any contributions to an existing pension account. Any contribution from yourself or your employer must be made to an accumulation account. Most super funds will keep your existing account open normally with a minimum balance to accept future contributions and keep your insurance cover (if applicable) in place.
- Investment earnings are tax free in a pension account. Investment earnings in an accumulation account are taxed up to 15%.
- The amount in your pension account is made up of a taxable component or a tax free component or both.
- The proportion of your account balance which is a taxable component determines the proportion of the pension income treated as taxable.
- Pension income is only assessable if you are under 60. After 60 it is tax free.
- If you are under 60 you receive a 15% tax offset on the taxable portion of your pension income.
Based on the above facts the time to consider a TTRP is when your turn 60. Moving your superannuation into a tax free environment (pension account) has the potential to save a considerable amount in tax on investment earnings and provides the opportunity to replace a portion of taxable employment income with a tax free income from super.
Let’s look at an example:
Peter is 60, has $305,000 in super and works full time on a salary of $75,000p.a.
His super is invested in a growth option which has an average return of 8% over the last 20 years.
His employer contributes 10% ($7,500) to super.
How much tax would Peter save if he started a TTRP?
From 1 July 2012 the maximum that can be contributed to super through your employer or by salary sacrifice will be $25,000 p.a. This means Peter can potentially contribute $17,500 through salary sacrifice. If Peter did not salary sacrifice this amount he would actually receive only $11,550 in his hand as tax at 32.5% plus 1.50% medicare levy (total tax of $5,950) would be deducted from it by his employer.
Peter would therefor need to draw $11,550 from his super if he needs the same income to meet his living needs.
Peter commences a TTRP with $300,000 leaving $5,000 in his existing account to cover ongoing insurance premiums. He elects to draw $11,550 on a monthly basis from his TTRP which is greater than the minimum ($9,000) and below the maximum ($30,000).
Over the course of the year the employer contributes and additional $17,500 into Peter’s super fund as agreed which is taxed at 15% (total tax $2,625).
Peter’s super fund (and pension account) also achieved its average return of 8% for the year providing investment earnings of $23,076 (calculated after pension payment) for the year.
Results
Peter has reduced his personal tax by $5,950 by reducing his taxable income by $17,500
Peter saved $3,461 in tax on investment earnings by starting a TTRP.
Peter’s super fund paid $2,625 in tax on the additional $17,500 contribution.
In total, Peter saved $6,786 in tax and his super fund grew by the same amount for the year.
This does not take into account fees, taxes or investment earnings on salary sacrifice contributions.
To start a TTRP it requires you to complete an application form which your super fund will provide. You will nominate the amount you wish to move into a TTRP from your existing account, the amount of income you wish to withdraw, the frequency of the payments and your investment option(s). You will also be required to provide certified photo identification which is a legal requirement for all superannuation withdrawals or pensions.
Points to consider before commencing a TTRP:
- Most or all super funds will charge an additional fee for commencing a TTRP. Take this fee into consideration when calculating your overall benefits.
- If you are under 60 and the income your draw from your pension is taxable it will reduce your overall benefit.
- If you are over 60 you should always be in a better position providing the additional fee to commence a TTRP is not greater than the tax savings on the investment earnings.
- Compare the cost of the administration fee to commence a TTRP against your investment option’s average return on your account balance as a guide to the likely benefit.
- If you are under 60 and have a low account balance the cost of commencing a TTRP may outweigh the tax benefits.
