Transition to retirement
Priority of preservation components
Where a superannuation benefit is cashed and the member has only met a condition of release with cashing restrictions (for example the 'reaching preservation age' condition of release) the cashing must come from preservation components in the following order:
1. unrestricted non-preserved
2. restricted non-preserved
It is important to note that cashing of benefits refers to the payment of benefits out of the superannuation system and not the rollover of benefits within the super system or the commencement of an income stream. In the case of a member who has a mixture of preservation components within their super balance using part of their balance to commence a TTR pension, this means that:
- The commencement of the TTR pension does not have to comply with the priority of preservation components rules (for examples, the member could choose to use 50% of their preserved and 50% of their unrestricted non-preserved benefits to commence the TTR pension, subject to their fund allowing this).
- Any payments other than rollovers made from the TTR pension, including pension payments and commutations, are subject to the priority of preservation components rules.
It is also important to note that under the super rules, superannuation funds may subject benefits to higher preservation requirements than the minimum required. IN the case of TTR pensions, this may involve a fund considering all benefits within a TTR pension to be preserved benefits. It is therefore important to confirm whether as preserved upon the commencement of their TTR pension.
Example involving a fund that maintains preservation components
Gareth starts a pre-retirement income stream with $300,000, made up of $40,000 unrestricted non-preserved, $20,000 restricted non-preserved and $240,000 preserved benefits. His annual payment, taken at the start of the year, is $20,000 and he earns an investment return of 8% pa. At the end of years one, two and three, Gareth's pre-retirement income stream balance is as follows (figures have not been adjusted for inflation):
|End of year 1||End of year 2||End of year 3|
|Unrestricted non-preserved benefit||$20,000
ie original $40,000 less the first $20,000 income payment
ie remaining $20,000 less the second $20,000 income payment
all of the original unrestricted non-preserved benefit has been paid as income payments
|Restricted non-preserved benefit||$20,000||$20,000||$0
the third $20,000 income payment then reduces restricted non-preserved benefits
1. (opening balance - $20,000 income payment) x 1.08
So, by the end of three years, all investment earnings have been included in Gareth's preserved benefits and his income payment have used up both his unrestricted and restricted non-preserved benefits.
|Tip: When dealing with a fund which fully preserves benefits upon commencement of a transition to retirement pension, consideration should be given to first commencing an account based pension with all unrestricted non-preserved benefits and afterwards a transition to retirement pension using preserved funds. The could allow the member to keep their unrestricted non-preserved funds in case of emergency.|
Last modified: Thursday, January 11, 2018