Transition to Retirement pension strategies increasingly popular

A TTR income stream is usually commenced as part of an income swap strategy – where an individual increases their concessional superannuation contributions (ie, salary sacrifice or personal concessional contributions) and exchanges this forgone salary income/self-employed income by drawing pension payments from a non-commutable income stream, FPA says.

Alternatively, it is part of lost income strategy where a person eases into retirement by reducing their work hours and replacing their income shortfall by drawing down their otherwise preserved superannuation benefits as a non-commutable income stream.

Alternate uses and variations to the income swap strategy which may benefit certain clients include paying interest only on a home loan and using the spare cash flow to increase concessional contributions – or using funds outside super to boost the TTR strategy.

Under TTR, your preservation age is not the same as your pension age. Your preservation age is the age you must reach before you can access your super and depends on when you were born.

The following table will help you work it out.

The TTR allocated pension has temporary withdrawal restrictions, except where the purpose of the commutation is to cash an unrestricted nonpreserved benefit, or to give effect to a release authority (ATO, Family Court, APRA).

Other exceptions include where, before the commutation, the pensioner has satisfied a further condition of release whereby the cashing restriction for the preserved and restricted non-preserved benefits is nil. A commutation is always allowed where the TTR allocated pension is being rolled back into the member’s superannuation account

The maximum annual income limit, each financial year, under a TTR allocated pension is restricted to 10% of the initial pension purchase price, and then, subsequently, the account balance at July 1 each year

The minimum annual income payment is determined by multiplying the account balance at commencement, or the account balance at July 1 each year in subsequent years, by the percentage based on the recipient’s age at those times. Where a pension is commenced part way through the financial year a pro-rated minimum is calculated based on the days remaining in the financial year.

Minimum TTR pension factors for 2013/14 financial year:

The taxation of TTR income payments received by a member is determined by the proportion of ‘taxable’ and ‘tax-free’ components, and the age of the member at the time the benefits are received.

The proportion of tax-free and taxable components, as a percentage of the income stream, is determined at commencement of the pension. The percentage is then locked in and applied to all future income payments of the TTR pension.

Where the TTR pension contains some tax-free component, this amount will be received completely tax free irrespective of age and will not be included in an individual’s income tax return.

This information is of a general nature only and does not take into account your personal circumstances or situation. We recommend that you seek qualified financial advice before making any investment decision. The bulletin is provided by First Super Pty Ltd ABN 42 053 498 472, AFSL No. 223988, as the Trustee of First Super ABN 56 286 625 181, If you intend to invest in or continue to hold this product you should obtain and consider a copy of the Allocated Pension Product Disclosure Statement which is available by phoning 1300 360 988. This bulletin is current as at November 17, 2014.