The concept of retirement has changed over the years for many Australians. No longer is it about giving up work completely, but finding the balance between having more time for yourself and financial security.
In the past it was common to reach a certain age, retire completely, cash out your superannuation and claim an Age Pension. In more recent times the use of income streams in retirement has become more common as more consumers have superannuation savings and can make the most of a concessional pension and taxation environment. Employees are also looking for more flexibility when nearing retirement as other health and lifestyle factors become more important.
A measure which was introduced in 2005 is the ability for members to draw an income from their superannuation if over preservation age and still working. This is known as a Transition to Retirement Pension (TRP) or Transition to Retirement Allocated Pension and it allows people to cut back their hours or perform part time work if desired, instead of ceasing work completely.
A TRP operates similarly to a normal ‘Account Based Income Stream’ (ABIS) or ‘allocated pension’ where a minimum drawdown according to the member’s age applies. It also has a maximum drawdown amount allowed each year of 10 per cent of the balance of the fund at commencement, or 1 July each financial year. The ability to choose from a range of asset allocation options is available as well as the ability to switch options on an ongoing basis. This means you have the ability to choose and switch between defensive, conservative, balanced and growth assets or even a combination of each.
With regard to taxation, any withdrawals made by superannuants who have reached age 60 are tax-free just as they are from any ‘taxed’ super fund or income stream. For those aged 55 to 59, the taxed component within the pension payment is fully assessed, however a 15 per cent tax offset applies. The amount of the taxable component within the pension payment is proportional to the taxable component within the member’s accumulation fund. Any earnings generated in the fund are also tax-free.
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From a Government Income Support point of view, the total amount of the TRP is assessed under the assets test. Under the income test the total pension payment less a ‘deductible amount’ which represents the member’s capital is assessed and added to any other assessable income. To determine the deductible amount, the purchase price or amount the pension was commenced with is divided by the member’s life expectancy. This ‘assessment free’ (deductible amount) amount stays fixed for the life of the pension unless commutations are made, in which case it is then recalculated.
It is also worth noting that the member is not obliged to convert all of their superannuation benefit to a TRP. This means that the member can hold a TRP pension, as well as accumulation benefits. This is particularly important for those who wish to reduce their work hours and to continue to have employer and personal contributions made.
As with most investments, fees apply and can vary according to the options and features offered. There are a number of issues which should be considered prior to commencing this course of action, so seeking professional advice may be prudent.
So if you are aged 55 to 64 and are considering retirement, but would prefer to ease into it rather than stop work completely, then a TRP might be worth considerating to help make the transition smoother.
Article written by Craig Hall
The National Information Centre on Retirement Investments Inc. (NICRI) is a government funded, independent consumer agency providing information to the general public on investment products.
Prior to acting on information provided in our articles, NICRI strongly recommends you confirm details in relation to your personal circumstances with any relevant government department.
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