Is a transition to retirement income stream still worthwhile? 

To access superannuation, an individual needs to meet a condition of release.

One of the conditions of release is attaining preservation age which entitles a person to access their superannuation in the form of an income stream, with a restriction that a maximum of up to 10% of balance can be accessed as pension payments.

Such income streams are commonly referred to as transition to retirement income streams (TRIS). They have been a powerful structure in financial planning since their advent in July 2005. However, with progressive reduction of the concessional contributions cap since 1 July 2007 and with the removal of earnings tax exemption on TRIS from 1 July 2017, many have questioned whether TRIS continue to have merit in financial planning.

This article takes you through some of the common applications of TRIS and highlights that TRIS can continue to add strategic value.

What is a TRIS?

A TRIS at its simplest form is an income stream which consists of preserved funds in part or in full. While one can be commenced when an individual reaches their preservation age, their TRIS is still preserved unless they meet another condition of release, typically retirement, which entitles them for a full release of their super benefits, including commencing an unrestricted account-based pension or purchasing a lifetime annuity.

Preservation age

Preservation age depends on a person’s date of birth and is gradually increasing to 60 for those born on or after 1 July 1964. Those born before 30 June 1962 have already reached their preservation age when they turned 57.

Table 1: Preservation age

Taxation of TRIS payments

TRIS payments are taxed to the individual based on the tax components of the pension payments.

Table 2:Taxation of TRIS pension payments

Where the individual turns 60 in a financial year, pension payments arising from the taxable component received before they turn 60 are taxed at MTR with a 15% offset. Pension payments received on or after the day the individual turns 60 are tax-free.

Payment restrictions of a TRIS

A TRIS has to pay a minimum of 4% with a maximum limit of 10% of the commencement value. An individual can choose pension payments anywhere between their minimum and maximum payment limit. Where a TRIS is commenced part way through the financial year, the minimum is pro-rated but the maximum is not. If a TRIS is commenced on or after 1 June, no payment is required in that financial year. The payment limit is then re-calculated based on the income stream account balance at the start of each financial year.

Earnings tax exemption

From 1 July 2017, a TRIS is no longer considered to be a retirement phase income stream. This means that earnings of a TRIS are taxed at the same rate as accumulation phase – maximum of 15%.

Transfer balance cap

As a TRIS is not considered to be a retirement phase income stream, commencement of a TRIS does not give rise to a credit towards an individual’s transfer balance account for the purposes of the transfer balance cap ($1.6 million in 2019-20). However, once the TRIS is considered to be a retirement phase income stream, the value at that time gives rise to a credit for the purposes of the transfer balance cap. Please note, different rules apply when an owner of a TRIS dies and a death benefit income stream is paid to a beneficiary.

When does a TRIS cease and become a retirement phase income stream?

It is important to understand when a TRIS ceases and events which cause it to be a retirement phase income stream. Once a TRIS ceases and it is considered to be a retirement phase income stream, it no longer has a maximum payment limit of 10%. It is also eligible for earnings tax exemption at that time with a credit for transfer balance cap purposes.

A TRIS ceases when a person:

• Turns 65
• Meets the retirement condition of release
• Meets the Total and Permanent Disablement condition of release 
• Meets the terminal medical condition of release 
• Dies and has nominated a reversionary beneficiary

A TRIS will move automatically into the retirement phase as soon as the individual reaches age 65. For the other conditions of release listed above, an individual needs to notify and/or apply to their super provider for the TRIS to move into the retirement phase. In these cases, the TRIS will move into the retirement phase at the time the provider is satisfied that a condition of release is met.

Proportioning rule

While the earnings of a TRIS at the product level or within the SMSF are taxed in the same way as accumulation, it is still considered to be an income stream. Therefore, pension payments are received in the same proportion of tax components as at commencement. Earnings are also applied to the tax components in the same proportion as at commencement. The proportioning rule effectively means that the proportion of tax components backing the TRIS are fixed based on the proportion at commencement.

Strategic applications of TRIS

Given that a TRIS enables up to 10% of a client’s superannuation balance to be accessed prior to retirement, financial advisers find many strategical applications of commencing a TRIS. These include simply accessing some of the superannuation savings, using the income stream to accelerate accumulation of retirement savings, replacing lost income when reducing working hours and estate planning considerations, all which we will consider below.

TRIS income swap strategy

A TRIS income swap strategy involves commencing a TRIS while working and using the TRIS pension payments as additional income to allow for salary sacrifice or personal deductible super contributions. This is one of the most popular use of TRIS enabling an acceleration of retirement savings. Generally, this strategy would be used by a person less than 65 years old who does not meet the retirement condition of release and does not have enough disposable income to maximise their concessional contributions cap.

Example – TRIS income swap strategy

Anjali, aged 60, is working full time, earning $100,000 p.a. To date, she has not been making voluntary super contributions as she has minimal surplus cashflow. She has a super balance of $200,000.

Table 3 looks at the application of a TRIS income swap strategy and how Anjali can receive identical disposable income but simultaneously also increase her retirement savings. 

Table 3: TRIS income swap strategy¹

A TRIS income swap strategy would typically involve consolidating accumulated savings with the TRIS balance from time to time to maximise the strategy in future years.

Use of TRIS income swap strategy based on different levels of income

Table 4: Value of TRIS income swap strategy of different levels of income.

Using a TRIS for proportioning advantages

Table 7: Proportioning rule estate planning advantage of TRIS

Using a TRIS to implement a similar strategy to cash-out and recontribution strategy 

The cash-out and recontribution strategy may be useful from an estate planning perspective when a client is planning to reduce potential super death benefit tax paid by non-dependent beneficiaries. This strategy may be particularly useful for those who have a balance well in excess of $300,000 so that the conversion of taxable component to tax-free component can be proactively maximised. 

Example – TRIS to implement a quasi cash-out and recontribution strategy

Anjali, aged 60, has a super balance of $500,000, consisting entirely of taxable component. She plans to retire when she turns 65. While she does have a spouse, there is a concern around the tax her non-dependent beneficiaries might pay should they both pass away at the same time. Even where her spouse inherits her super balance, there is a concern that the spouse may not be able to effect a recontribution strategy in the future (for example due to either not being able to contribute based on their age and/or restrictions imposed by non-concessional contributions cap).

The recontributed amount from year two would then be consolidated with the smaller TRIS and any increase in accumulation phase (from salary sacrifice, personal deductible contributions and SG) is consolidated with the larger TRIS. This arrangement is repeated until she turns 65, whereby she meets a condition of release allowing for full release of her super benefits. At this point Anjali could then do a higher recontribution strategy from the income stream which consists entirely of taxable component, subject to the bring-forward non-concessional contributions cap, at that time.

Using a TRIS to equalise account balances for transfer balance cap purposes

The transfer balance cap ($1.6 million in 2019-20) imposes a restriction on the amount of superannuation savings which can be transferred/retained in retirement phase income streams. Where one member of a couple has a higher super balance which is approaching the transfer balance cap, or where the couple have combined balances exceeding the transfer balance cap, a TRIS could assist to proactively equalise their super balances. 

Example – TRIS to equalise super balances

Anjali’s spouse, Raja, aged 60, has a super balance of $2 million. He continues to work as a full-time IT consultant. They both plan to retire at age 65, and with concessional contributions up to the cap as well as estimated earnings of 4.4% (net of taxes and fees), he is projected to have $2.6 million in his super at age 65. Anjali has $500,000 in her superannuation.