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Transition to retirement

Income streams for transition to retirement

Section: 15.2

Effective 1 July 2017

The tax exempt status of income from assets supporting transition to retirement (TTR) income streams will be removed from 1 July 2017. Earnings will then be taxed at 15 per cent. This changes applies irrespective of when the TTR income stream commenced, i.e. no grandfathering applies.

The Government states that reducing the tax concessional nature of transition to retirement income streams will ensure they are fit for purpose and not primarily accessed for tax minimization purposes.

Further, individuals will no longer be able to treat certain superannuation income stream payments as lump sums for tax purposes, which currently makes them tax-free up to the low rate cap of $195,000.

How will this affect your client?

For clients aged 60 or over, TTR strategies may still be worthwhile as pension payments are tax free and allow tax effective salary sacrifice contributions. However for clients under age 60, the tax benefits are minimal.

The taxation of earnings in pension phase will only apply to 'transition to retirement' income streams where the client has reached preservation age but not yet retired. Presumably income streams where the client has met a full condition of release such as retirement will continue to have the earnings tax exemption apply. Clients may look at arrangements involving ceasing a gainful employment arrangement over age 60 or ceasing work and declaring permanent retirement to meet the retirement condition of release.

From a superannuation fund perspective, administering the taxation of earnings in pension phase for transition to retirement pensions will add complexity.

Super may be accessed from preservation age using any of the following income streams, which are all generally non-commutable:

Income stream Commutation
A transition to retirement income stream (post 1 July 2007) May be commuted after meeting a full condition of release (eg age 65)
A non-commutable allocated pension or annuity (pre 20 September 2007) May be commuted after meeting a full condition of release (eg age 65)
A non-commutable pension or annuity Always non-commutable*

* See the limited exceptions for commutations in section 15.3.

Transition to retirement income stream
A transition to retirement income stream is an account-based income stream or annuity commenced on or after 1 July 2007. The total amount of payments in any year are limited to a maximum of 10% of the account balance at the start of each financial year.

This maximum payment is not required by legislation to be reduced on a pro-rata basis if the transition to retirement income stream is started or commuted part way through the year.

The minimum income payments for a transition to retirement income stream is 4% of the account balance at the start of the financial year. If the income stream is commenced part way through a financial year the minimum payment is determined based on a pro-rata basis. A transition to retirement income stream must meet the new post 1 July 2007 account-based pension and annuity standards (see section 16.4).

Non-commutable allocated pension or annuity
A non-commutable allocated pension or annuity is an allocated pension or annuity commenced prior to 20 September 2007, which the trustee made non-commutable for the purposes of transition to retirement.

Non-commutable pension or annuity (formerly complying)
A non-commutable pension or annuity is one of the following types of complying income streams:

  • lifetime
  • life expectancy, or
  • term allocated.

From 20 September 2007, generally only non-commutable annuities are available.

Last modified: Tuesday, May 2, 2017