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Transition to retirement

Income streams for transition to retirement

Section: 15.2

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

The transition to retirement income streams in the table above, are collectively referred to as 'TRIS' from 1 July 2017. These income streams are not 'retirement phase' income streams for tax purposes unless one of the following apply:

  • The client has attained the age of 65, regardless of whether the client has notified the income stream provider
  • The client has notified the income stream provider that they satisfied one of the following conditions of release:
    • Terminal medical condition
    • Permanent incapacity
    • Retirement

From 1 July 2017, TRIS that are not retirement phase income streams do not qualify for a tax exemption on the earnings on assets supporting the income stream. In addition, they do not count as a credit against the transfer balance account.

Issues with reversionary TRIS: pending legislation

From 1 July 2017, there has been a requirement that death benefit income streams must be in retirement phase. This has caused a problem for reversionary TRIS, as the person nominated as a reversionary beneficiary must themselves be able to satisfy one of the specified conditions of release at the time of the original member's death.

As a result, the reversionary beneficiary must already have turned 65 or have been retired, permanently incapacitated or terminally ill at the time of the member's death for the TRIS to be able to revert to them.

Where the person nominated as a reversionary beneficiary has not satisfied one of the specified conditions of release prior to the member's death, the reversionary nomination will technically be invalid -as the income stream will not be permitted to revert under the death benefit payment rules.

In this case, depending on the fund rules, the death benefit could be paid to the:

  • deceased member's estate, or
  • member's dependent beneficiaries as either a lump sum or a new account based pension.

Depending on the circumstances, this could result in the member losing the ability to receive the death benefit as an income stream, or not receiving any of the death benefit.

Treasury Laws Amendment (2018 Measures No 4) Bill 2018, amends the rules that determine when a TRIS is in retirement phase to ensure that a reversionary TRIS will always meet the definition of a retirement phase income stream even when the beneficiary has not met a condition of release. At the time of writing this legislation had not been enacted.

1. 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.

Income stream payments always treated as income stream benefits for tax purposes

Prior to 1 July 2017, it was arguably possible for a client receiving a transition to retirement account based pension to elect for their regular pension payments to be taxed as superannuation lump sums.

From 1 July 2017, it is no longer possible to make this election, and any payment from an income stream (excluding commutations) is taxed as a superannuation income stream benefit.

Commutations don't count towards minimum payment requirement

Another change from 1 July 2017 is that both partial and full commutations of an income stream received by a member are always superannuation lump sums for tax purposes. Prior to this date, partial commutations were taxed as superannuation income stream benefits unless an election was made by the member.

From 1 July 2017, partial commutations do not count towards the minimum payment requirement of a transition to retirement income stream.

2. 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.

3. 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.

Non-commutable pensions or annuities commenced prior to 20 September 2007 received beneficial treatment for social security and were referred to as 'complying'. For income streams commenced on or after 20 September 2007, generally only non-commutable annuities are complying for social security purposes. See section 18 for more information on the social security treatment of income streams.

Last modified: Tuesday, November 20, 2018