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 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
|Date of birth||Preservation age|
|Born before 1 July 1962||Already reached preservation age|
|1 July 1962 to 30 June 1963||58|
|1 July 1963 to 30 June 1964||59|
|On or after 1 July 1964||60|
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
From preservation age and under 60
60 or over
|Taxable component - element taxed||Taxed at marginal tax rate (MTR) with a 15% offset||Tax-free|
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:
- 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.
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
No income swap strategy
Income swap strategy
|Salary sacrifice / personal deductible super contributions||Nil||$15,500|
|TRIS pension payments||Nil||$9,403|
|Tax including Medicare Levy||$25,717||$19,620|
|Take home pay||$74,283||$74,283|
|Net contributions to super||$8,075||$21,2504|
|Net additional super funds||Not applicable||$3,7725|
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.
Using the TRIS income swap strategy, Anjali was able to increase her retirement savings by $3,772 in the first year. Assuming that Anjali retires at age 65, using the income swap strategy over five years could provide a significant boost to her retirement savings.
While the above example highlights the income swap strategy for an employee, similar dynamics exist for a self-employed person, except for the fact that their available concessional contributions cap is not being consumed by super guarantee (SG) contributions.
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.
|Income||Net additional super funds due to income swap strategy|
What if Anjali was over preservation age but under 60?
TRIS pension payments were tax-free as Anjali was over 60. If she was under 60, pension payments consisting of taxable component – element taxed are taxable at her marginal tax rate with a 15% tax offset as per Table 2. Broadly, taxation of pension payments for someone under 60 cancels some of the benefit of the TRIS income swap strategy.
However, if Anjali had a significant tax-free component backing the TRIS, then there may still be value in implementing the income swap strategy.
Application of the unused concessional contributions cap in 2018-19
Traditionally, the concessional contributions cap has worked on a use it or lose it basis. However, from 1 July 2018, an individual has been able to accrue unused amounts of the concessional contributions cap for a maximum of five years. The unused amounts can then be used in the following financial years as long as their total super balance at the end of the previous financial year was less than $500,000.
Applying this to Anjali, as she has not been making voluntary contributions to date, her unused concessional contributions cap was $15,500 from 2018-19. This means in 2019-20, the amount she can make as voluntary concessional contributions, allowing for SG of $9,500, is $31,000 ($15,500 + $15,500). Having a higher voluntary concessional contributions cap to work with could allow for a bigger benefit from the TRIS income swap strategy.
Table 5: TRIS income swap strategy with unused concessional contributions
|No TRIS income swap strategy||TRIS income swap strategy with unused concessional contributions from 2018-19|
|Salary sacrifice / personal deductible super contribution||Nil||$31,000|
|TRIS pension payments||Nil||$19,555|
|Tax including Medicare Levy||$25,717||$14,272|
|Take home pay||$74,283||$74,283|
|Net contributions to super||$8,075||$34,425|
|Net additional super funds||Not applicable||$6,7957|
As evident from the above table, with the ability to salary sacrifice the unused concessional contributions cap from 2018-19, the value of the TRIS income swap strategy to Anjali is much higher compared to just salary sacrificing the difference between the standard concessional contributions cap and SG.
Using a TRIS to receive up to 10% as pension payments
Another popular use of TRIS is to simply access up to 10% of TRIS balance as a pension payment. Commonly, this is used to replace lost income when reducing working hours or provide cashflow for any other desired reason.
Going back to Anjali, she reduces her working hours to 4 days a week, now earning $80,000 per annum. With a super balance of $200,000, she can receive up to 10% of her balance to replace the reduced income.
Table 6: Using to replace reduced income
|Full time hours||Part-time hours|
|Tax including Medicare Levy||$25,717||$18,067|
|TRIS pension payments||Nil||$12,350|
|Take home pay||$74,283||$74,283|
Using a TRIS for proportioning advantages
Example – proportioning ruleAnjali, aged 60, sold an investment property and wishes to contribute $300,000 as a non-concessional contribution to benefit from the concessional tax rates in superannuation. Her existing superannuation balance is $200,000, consisting entirely of taxable component.
Table 7: Proportioning rule estate planning advantage of TRIS
|After 5 years||Accumulation phase||TRIS|
|Super death benefit tax||$14,090||Nil|
|Cumulative pension payments||Nil||$64,239|
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.
Using a TRIS for Centrelink sheltering strategy
The current Age Pension assets test disqualification limit for a couple who own their home is $863,500. Assuming in 7 years time, the disqualification limit is indexed to $1.045 million (based on approximately 2.8% CPI) and Raja’s super savings with contributions (fully using the concessional contributions cap each year until retirement) and earnings (based on 4% net of taxes and fees) increases to approximately $1.48 million, his assessable assets are well in excess of the disqualification limit. Assuming the non-concessional contributions cap is also indexed to $120,000 on an annual basis in seven years time, while Raja could do a cash-out and recontribution of $360,000 using the future non-concessional bring-forward cap, his assessable assets will still be in excess of the disqualification limit ($1.12 million in assessable assets is greater than $1.045 million Age Pension disqualification limit), which would mean he does not receive the Age Pension when he turns pension age.
A TRIS could assist in proactively considering the sheltering strategy by using the 10% maximum payments from Raja’s account each financial year until retirement to make a spouse contribution to Anjali’s account each year. Raja could reduce his assessable assets by making a spouse contribution up to the annual non-concessional contributions cap for six years and up to the bring-forward amount in the final year, significantly increasing his Age Pension entitlements for a five year period until Anjali reaches pension age.