Although the attractiveness of a transition to retirement income stream was reduced in 2017, there are still some valuable strategies that planners can recommend to their clients.

Transition to retirement income streams (TRIS) have been the cornerstone of retirement income planning for over a decade. However, the Government reduced their attractiveness in 2017 with the removal of the tax exemption for assets that support the income stream. Understandably, financial planners questioned their ongoing viability.

Now that some time has elapsed since the changes, we can look at what uses they have in the current environment. This article explores the strategies available to provide your clients with superior outcomes.

Back to basics – a TRIS refresher

TRIS are income streams that are commenced using super but there are some restrictions. The following section reviews the key features and restrictions of TRIS:

• The person must have reached preservation age.
• A minimum pension payment of 4 per cent of the account balance must be made at commencement (usually pro-rated) and at 1 July thereafter. There is no requirement for a payment to be made in the first financial year, if it commences in June of that financial year (product rules permitting).
• The maximum annual payment is capped at 10 per cent of the account balance at commencement and at 1 July each year thereafter.
• Investment returns on assets supporting the TRIS are taxed at up to 15 per cent in a similar way to earnings in super accumulation phase.
• It may consist of preserved, restricted non-preserved and unrestricted non-preserved benefits. A person can choose to take preserved and non-preserved components in any proportion they wish (product rules permitting).
• If a TRIS is not commenced with only preserved benefits, then the payments are deemed to come from the unrestricted non-preserved components first, then the restricted non-preserved component and finally the preserved component.
• Lump sum withdrawals are only permitted from the unrestricted non-preserved component.
• A TRIS is not a retirement phase income stream and does not count towards the transfer balance cap.

What happens when a condition of release is satisfied?

Upon satisfying a condition of release with no cashing restrictions, TRIS holders may notify their provider as soon as possible to gain the tax exemption on investment returns and remove the restrictions on pension payments and lump sums. At the time of notification, the client will have a retirement income stream that counts towards the transfer balance cap.

The two most common examples of satisfying a condition of release include making a declaration of retirement or upon reaching 65 years of age. Please note, upon reaching age 65, the TRIS automatically becomes a retirement phase income stream and the super fund does not have to be notified.

TRIS strategy

Combining a TRIS with voluntary contributions may be a useful strategy to increase the retirement savings of clients. Strategy options which take into account a client’s age and the taxable component of their super are detailed below.

1. Salary sacrifice and TRIS

This strategy involves salary sacrificing a portion of pre-tax income to super and replacing all or part of the reduced take-home pay by receiving a TRIS pension payment.

A similar outcome may be obtained by making personal tax-deductible super contributions, instead of salary sacrifice contributions. When deciding whether your client should make salary sacrifice or personal tax-deductible super contributions, you should consider the restrictions of the concessional contributions cap and whether the client is able to make catch-up concessional contributions.

Before implementing this strategy, you should also consider whether Division 293 tax will apply to concessional contributions.

The benefit of combining concessional contributions with a TRIS depends on many factors, including the member’s age and tax-free ratio of pension payments.

Case study 1: Under age 60

Paul, age 58, has a salary package of $100,000 per year excluding super. Paul has no immediate plans of reducing his work hours because he plans to retire completely from the workforce when he reaches age 65. Paul has $300,000 in super, which consists of a taxable component only and is fully preserved. The super is invested in a balanced option and has historically earned an average of 6 per cent per year.

Paul is considering a TRIS, which will allow him to salary sacrifice a greater portion of his pre-tax income to super. Paul currently receives after-tax pay of $74,283. If Paul was to use his remaining concessional contributions cap by salary sacrificing $15,500 into super, he will receive a gross salary of $84,500. He can supplement his after-tax pay with a TRIS pension payment of $12,315, which means Paul’s after-tax income will remain unchanged at $74,283.

Paul’s cash flow position before and after implementing the TRIS income stream strategy will be (Table 1):

Table 1

Implementing this strategy will result in an increased retirement benefit in year one of $860, which is comprised of his additional concessional contributions of $13,175 ($15,500 less 15 per cent tax) less his TRIS pension payment of $12,315.

A benefit of $860 in a year can be a difficult proposition to justify for a client. You should consider whether the strategy outweighs the cost of advice and implementation.

Case study 2: Under age 60 and making a non-concessional contribution

It may be difficult to justify commencing a TRIS for those who are under age 60, as the benefits of the strategy are generally lower than for those aged 60-64, because the TRIS pension payments are not tax-free. One strategy to consider is making a non-concessional contribution to super and using the amount to commence a TRIS.

Returning to the previous case study of Paul (case study 1), let’s consider the impact of Paul using $100,000 from his bank account to make a non-concessional contribution to a separate superannuation fund and commencing a TRIS with that $100,000.

Table 2 illustrates his current position, Strategy 1 when a TRIS is commenced using $300,000 (100 per cent taxable), and Strategy 2 when a TRIS is commenced using $100,000 (100 per cent tax-free).

Table 2

The benefits of these strategies compared to his current position are (Table 3):

Table 3

As illustrated in Strategy 2, there is a substantial benefit to the client by making a non-concessional contribution to super and using the proceeds to commence a TRIS, which is 100 per cent tax-free. The value of the benefit may mean a TRIS and contribution strategy is a viable option for those who are under age 60.

Case study 3: At least age 60 or 100 per cent tax-free component

If we now assume that Paul is at least age 60, he could still use his remaining concessional contributions cap by salary sacrificing $15,500 into super. If he commenced a TRIS with $300,000, the minimum pension payment of $12,000 would provide him with more income than he currently receives.

If he doesn’t require additional income, he could commence a TRIS with $200,000 of his super. Please note that TRIS investment returns are taxed at the same rate as super in accumulation phase.

He would receive a nominated pension payment from his TRIS of $9,403, which would result in his after-tax income remaining the same at $74,283. Implementing this strategy will result in an increased retirement benefit in year one of $3,772, which is comprised of his additional concessional contributions of $13,175 ($15,500 less 15 per cent tax) less his TRIS pension payment of $9,403 (Table 4).

Table 4

Case study 4: Age 59 and turning age 60 during the financial year

In this situation, it is beneficial to consider delaying pension payments until after the person reaches age 60, and in particular, for those who are turning age 60 in a financial year.

Let’s assume Paul turns 60 on 1 January 2020, and he commenced a TRIS of $200,000 on 1 July 2019. Any pension payments that he receives from 1 July 2019 and before his 60th birthday will be taxable. However, if he defers any pension payments until after his 60th birthday, then they will be tax-free.

Table 5 compares Strategy 3, where he receives pension payments throughout the financial year (50 per cent of which are taxable from 1 July 2019 up until 31 December 2019, while he is age 59) and Strategy 4 where he receives only tax-free pension payments from age 60.

Table 5

Strategy 3 results in an increased retirement benefit in year one of $2,757, which is comprised of his additional concessional contributions of $13,175 ($15,500 less 15 per cent tax) less his TRIS pension payment of $10,418. However, Strategy 4 shows a higher increased retirement benefit in year one of $3,772, which is comprised of his additional concessional contributions of $13,175 ($15,500 less 15 per cent tax) less his TRIS pension payment of $9,403.

The difference in increased retirement benefits between the two strategies is $1,016, which illustrates that he is at least $1,016 better off by delaying pension payments until after his 60th birthday.

2. TRIS and re-contribution strategy

Similar to a withdrawal and re-contribution strategy, TRIS pension payments may be re-contributed to super as a non-concessional contribution (subject to the non-concessional contributions cap) to increase the tax-free component of the super interest and potentially reduce the tax payable for a super death benefit paid to a non-tax dependant.

Case study 5: TRIS and re-contribution

Raelene, age 60, has a salary package of $150,000 per year. She is already salary sacrificing up to her concessional cap and requires no additional income, therefore there is no benefit implementing a TRIS and salary sacrifice strategy.

An alternative strategy to consider is to commence a TRIS with Raelene’s entire super balance of $600,000. Raelene will receive the maximum pension payment and re-contribute this amount to a super fund. The objective of the strategy is to increase the tax-free component with a view to reducing the tax payable on a death benefit received by her adult children.

If Raelene passed away with a super balance of $600,000 (100 per cent taxable), then her adult children would receive a net amount of $498,000, as illustrated in Table 6.

Table 6

However, if Raelene commenced a TRIS with $600,000 and received the maximum pension ($60,000), which was contributed back to super as a non-concessional contribution, then her adult children would receive a net amount of $508,200, as illustrated in Table 7.

Table 7

By implementing this strategy, we can increase the death benefit lump sum paid to her adult children by up to $10,200 ($508,200 – $498,000).

The effectiveness of this strategy could be increased if Raelene repeated the strategy in the future. In addition, she may want to consider commencing another TRIS with the non-concessional contributions, to lock in the tax components within the fund. You will need to consider the limitations of the non-concessional contribution cap. Likewise, you would need to balance the benefit of the strategy against other considerations, such as the cost of advice and buy/sell spreads.

Conclusion

Although the attractiveness of a TRIS was reduced in 2017, there are still some valuable strategies that you can recommend for your clients. You should carefully consider what the right combination is for your client, taking into account their income needs, the taxation benefits, and estate planning requirements.

A considered approach will mean you avoid falling into the trap of discounting the use of TRIS’s due to the removal of the tax exemption on investment returns and instead, may uncover a strategy which could benefit clients.

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To answer the questions, click here.

1. Which of the following statements regarding a transition to retirement income stream (TRIS) are true?

1. A TRIS must have preserved benefits only.
2. Pension payments are drawn firstly from the unrestricted non-preserved component, then restricted non-preserved component and then the preserved component.
3. TRIS are not assessed for social security income support payments, as the owner has not attained Age Pension age.
4. The maximum annual payment that can be drawn is 10 per cent of the account balance at commencement, then each 1 July. Some product providers may pro-rate this in the year of commencement.
5. A transition to retirement income stream must satisfy at least the minimum pension requirements for an account-based pension.

1. 1, 3 and 4 only.
2. 2, 4 and 5 only.
3. 2, 3 and 4 only.
4. 1, 4 and 5 only.

2. What is the maximum annual payment from a TRIS in its second year? Assume the pension is all preserved component and the owner does not meet another condition of release.

1. 10 per cent of the balance at the date of payment.
2. 10 per cent of the balance as at 1 July in the financial year of payment.
3. 10 per cent of the balance as at 1 January in the year of payment.
4. 10 per cent of the balance at the commencement of the TRIS.

3. Henry is age 63 and receives a TRIS. His pension is 50 per cent taxable component (taxed element) and 50 per cent tax-free component. How are Henry’s pension payments taxed?

1. 50 per cent is taxed at Henry’s marginal tax rate, with a 15 per cent tax offset applied, and 50 per cent is tax-free.
2. 50 per cent is taxed at Henry’s marginal tax rate and 50 per cent is tax-free.
3. 100 per cent is taxed at Henry’s marginal tax rate, with a 15 per cent tax offset applied.
4. Henry pays no tax on his pension payment

4. Mark turns age 60 on 1 June 2020. He commenced a TRIS on 1 July 2019. Assuming his pension is 100 per cent taxable component (taxed element), how are Mark’s pension payments taxed?

1. 100 per cent is taxed at Mark’s marginal tax rate, with a 15 per cent tax offset applied.
2. Mark pays no tax on his pension payment
3. Mark pays no tax on his pension payments, as long as they are made on or after his 60^th
4. They are taxed on a pro-rated basis based upon the number of days he was under age 60 during the financial year.

5. Sally is age 62 and already salary sacrifices up to her concessional contribution cap. Is there any benefit in her commencing a TRIS?

1. No, as she is unable to make any additional concessional contributions.
2. Yes, providing she can make additional non-concessional contributions.
3. Yes, providing she is a tax resident of Australia.
4. No, as she is aged over 60.