Pre-Retirement & Retirement Strategies – Part 2
Transition to Retirement Income Streams
If you are approaching age 55, have attained the age of 55 or older and are considering ways in which you can give your superannuation fund an edge, may be it’s time you started considering implementing the use of a Transition to Retirement Income Stream.
Continuing on from last week’s discussion (Pre-Retirement & Retirement Strategies – Part 1), in this week’s discussion, we’ll be looking at what a Transition to Retirement Income Stream (TRIS) is, how and when you can use one, and we’ll also take a look at a financial strategy which could be implemented today to help you make a smoother transition to retirement and even put the finishing touches on your final nest egg.
Before you read this article, to ensure you fully understand the concepts backing some of this discussion, if you haven’t already done so, I highly recommend that you read last week’s article first which outlines the basic concepts of what drives the strategies in this discussion. You can go to the article by clicking on this link (Pre-Retirement & Retirement Strategies – Part 1).
WHAT IS A TRANSITION TO RETIREMENT INCOME STREAM?
A transition to retirement income stream or TRIS, as we’ll refer to it from here on, is a particular type of account-based income stream. You, as a member of a superannuation fund, be it a self-managed superannuation fund, public offer, industry, corporate or other type of superannuation fund, will, in the vast majority of cases, be able to establish one any time after attaining your preservation age. For those who are considering such an arrangement today, you will need to be 55 years of age or older.
A TRIS, because it is a form of superannuation pension, allows you to access your benefits contained within the superannuation environment subject to certain rules. By commencing one it will allow you to gain access to a number of advantageous outcomes not afforded to superannuation member accounts that remain 100% in the accumulation phase.
In order to establish a TRIS you will:
- have reached your preservation age (currently age 55),
- need to have money contained within the superannuation environment in order to commence the pension with superannuation monies,
- under normal circumstances, be required to draw a minimum of 4% of your funds balance by way of an annual pension payment/s (GFC relief is provided for the 2012/13 financial year lowering the minimum drawn down to 3%),
- be restricted to drawing down no more than 10% of your funds balance for the financial year, and
- not be eligible to make a lump sum withdrawal from the TRIS except under certain circumstances such as death or meeting another condition of release (refer to last weeks article).
WHY WOULD YOU WANT TO ESTABLISH A TRIS?
The reasons why you would want to establish a TRIS are almost infinite. It could be because you might want to pay down your mortgage quicker, provide financial support to a dependent, buy a new toy such as a motor bike or boat or any other reason you could think of. But in general, most people look to start a pension for two broad reasons:
- you wish to reduce your working hours by supplementing your employment income that you have forgone with income payments from your superannuation fund, or
- you wish to make your superannuation arrangements more tax effective, which allows you to accelerate the growth of your nest egg.
In this week’s article, we’ll look at the first strategy and how and why someone might use their superannuation fund to partially fund their lifestyle. In next weeks article we’ll take a look at how you can use a TRIS to enhance the tax effectiveness of your superannuation fund and your income.
SUPPLEMENTING YOU REDUCED INCOME
It is not uncommon for most people who are approaching their target retirement age to start to consider reducing the number of hours they are spending at work. Some will consider job sharing arrangements, others might look for part-time positions and others may simply be looking for less stressful and demanding jobs. In each of these instances or for what ever reason it may be, you are almost always faced with the trade-off of less hours BUT less disposable income. By using a TRIS, however, you may be able to replace some and possibly even all of that income you would otherwise have had to do without. But this strategy isn’t suitable for everyone as there are obvious downsides to this strategy.
The most obvious downside to this strategy is that early access to your superannuation benefits may reduce the amount of superannuation you thought you might otherwise have had for full retirement. However, having said that, in some instances a simple change in your work life balance could infact encourage you to remain in the work force for much longer. With many pre-retirees looking for ways to make their nest eggs last longer, more and more pre-retirees are considering the option of working for longer but working less.
It is important to remember, though, that once you start a superannuation income stream, as we outlined in last weeks article, you are infact supplementing your previously fully marginally taxed employment or business income with tax advantaged superannuation income AND on top of that, your superannuation fund also becomes a tax free environment.
So what are the benefits of drawing an income stream?
The benefits of drawing an income stream come from two sources:
- the taxation rate that will be applied to your investment returns on the assets that support the payment of that income stream, and
- the taxation of benefits applied to the income stream when drawn from superannuation.
Last week I touched on the taxation benefits applied to the assets which support the payment of a superannuation income stream such as a TRIS. To summarise, upon commencing a TRIS those benefits essentially become tax free assets so that those assets will no longer have taxation applied to their returns so long as the income stream remains compliant.
But what we didn’t discuss was how the income drawn from the superannuation fund was taxed in the hands of the income stream recipient. And this is where the choice to reduce your working hours can become a little easier to make.
You see, when you establish any income stream from superannuation, the taxation of that income stream is also subject to favourable taxation treatment. As the rules are currently written, for those aged between 55 and 59, any income drawn from your fund via an income stream, which comes from the taxable component of your superannuation fund (generally the component that represents the amount of pre-tax contributions you have made to your fund such as 9% SG, salary sacrifice, self employed member contributions or investment returns), then that income is taxed at your marginal tax rate, BUT receives a 15% tax offset.
For income which comes from the non-taxable component, i.e. income drawn from the component which often represents large after tax contributions funded from large asset sales outside super, this income will be able to be withdrawn entirely tax free.
For those who have attained the age of 60, the tax break becomes even better. You see once you have attained the age of 60 AND you have established a superannuation income stream, TRIS or other, not only have the assets which support that income stream become completely tax free for the life of the income stream, but so too is the periodical payments paid to the recipient. That means for many who have had the foresight to move all their retirement assets into superannuation, they may never need to file a tax return ever again.
So what’s the relevance of all this? Well for anyone who is considering moving to part-time work, depending on your age, you may be surprised with just how little you will need to draw down in order to allow you to move to part-time work and still enjoy a comfortable lifestyle.
If this is something that you have considered but have been unsure of how this may apply to you, then we encourage you to speak with one of our financial strategists today for a No Cost, No Obligation consultation on 03 8657 7640 or email [email protected]. We would be more than happy to review your superannuation strategy and give you the advice you need for more a more fulfilling life.
The information contained in this report is General in nature and has been prepared without taking into account your objectives, financial situation and needs.