What is a Transition to Retirement Simple Account Based Pension Under relatively new rules, a member is now allowed to commence a Simple Account Based Pension from their SMSF once they are at least 55 years of age even if they are still working. This type of Simple Account Based pension is known as a "Transition to Retirement" Simple Account Based Pension. If you are over 55 and have retired then this type of Simple Account Based Pension is not available and you would simply start a normal Simple Account Based Pension in this case.
Difference between a Normal Simple Account Based Pension and a Transition to Retirement Simple Account Based Pension
Essentially there are two main differences between a transition to retirement Simple Account Based pension and a normal Simple Account Based Pension namely:
> A normal Simple Account Based pension is commenced when you retire (and are at least 55). A transition to retirement Simple Account Based Pension is commenced whilst you are still working (and are at least 55)
> With a normal Simple Account Based Pension you can cash out lump sums whenever you like. With a transition to retirement Simple Account Based pension you cannot cash out lump sums and can only take a pension stream. It is noted that you can convert a transition to retirement Simple Account Based Pension to a normal Simple Account Based Pension when you retire enabling you to then cashout lump sums.
Summary of a Transition to Retirement Simple Account Based Pension
A summary of the implications of implementing a "Transition to Retirement" Simple Account Based Pension (TRAP) are detailed below::
> The tax rate of your SMSF reduces to NIL when you commence a TRAP Simple Pension from the Fund.
> You never have to pay tax on your investments earnings in the Fund after commencing a TRAP.
> You never have to pay tax on your investments capital growth in the Fund after commencing a TRAP.
> You receive a cheque from the ATO each year equal to any franking credits received by your SMSF.
> You can access income from your Fund up to 10% of the Fund's Assets annually.
> You do not have to change your SMSF Investments when you start a Simple Account Based Pension.
Minimum Pension Income
You will be able to choose the amount you take as a Simple Account Based Pension each year subject to a minimum percentage drawdown of your account balance of 4% up to age 65 after which time you can covert to a normal Simple Account Based Pension even if still working.
In the Pension Commencement Year the percentage to be taken is applied to the Commencement Value of the Pension in that year (prorated if commenced part way during the year). Importantly each Financial Year the Pension Balance is recalculated on 1 July and the percentage is applied to the new balance on that date to determine the minimum amount that must be drawn in the relevant year. The maximum annual pension drawdown for a TRAP is 10%.
Pension Drawdown Relief For the 2011 Financial Year the Minimum Pension Drawdown required to be taken when you commence a Pension, has been reduced to an amount equal to half the minimum amounts detailed above. There has been no change to the maximum amount which remains at 10%.
For example for a person aged between 55 and 64, the Minimum Pension Drawdown was previously 4% per annum. Under the Pension Drawdown Relief changes the Minimum Pension Drawdown has been reduced to 2% per annum. Payment Frequency
Once you have determined the amount you want to take as a Simple Account Based Pension you must transfer the payments from your SMSF account to your personal account to evidence the pension payment. The nominated Simple Account Based Pension payment can be paid either monthly, quarterly, half-yearly or annual basis, but must be paid at least annually.
Lump Sum Withdrawals
You are not permitted to make Lump Sum Withdrawals from a Transition to Retirement Simple Account Based Pension as the Pension is a Non Commutable Income Stream. However when you retire you can convert to a standard Simple Account Based Pension at which time you can access Lump Sums as required.
Taxation of Income and Capital Gains after commencing a Transition to Retirement Simple Account Based Pension
As detailed above as the SMSF tax rate reduces to NIL when you commence a transition to retirement Simple Account Based pension. This means that all income and capital gains the SMSF generates after the pension is commenced will be tax free. Importantly any accumulated capital gains up to the time of commencing the transition to retirement Simple Account Based Pension will also never attract tax if sold after the Fund converts to Simple Account Based Pension mode. For example assume you bought shares in the year 2004 for your Fund and they increased in value by $100,000 by July 2010 when you commenced a transition to retirement Simple Account Based Pension. As long as you sell the shares after July 2010 when you commenced the transition to retirement Simple Account Based Pension you will never pay tax on that capital gain.
Taxation of Pension Payments made by the SMSF to you
When you retire and commence a transition to retirement Simple Account Based Pension between the age of 55 and 59 the income you draw is taxable at your personal tax rate. It is only tax free if you are above 60. However no tax is payable on the UDC (Non Concessional Contribution) portion of the income drawn (known as the exempt amount). A 15% tax rebate is also applied to the pension payment further reducing the tax on the pension paid. Given this, some tax may be payable on the pension income if the transition to retirement Simple Account Based Pension is commenced before 60. However if the pension income is the sole source of your income then you can generally take approximately $40,000 per year in income tax free. Some tax may apply on income drawn above this amount.
Refund of Franking Credits
As detailed above because the SMSF tax rate falls to NIL when you commence a transition to retirement Simple Account Based pension you are entitled to receive any franking credits on Australian Share Dividends in cash from the ATO. Franking Credits simply represent tax paid by Australian companies on dividends your Fund is receiving. Given that the company has paid 30% tax and your Fund tax rate in pension mode is Nil, the entire 30% tax paid is refundable to your Fund. Example: For every $10,000 received in fully franked dividend income, your Fund receives $4,285 as a cash refund from the ATO each and every year the dividends are paid, after you commence a transition to retirement Simple Account Based Pension!
Contributions after commencing a Transition to Retirement Simple Account Based Pension
You can continue contributing to your SMSF even after you commence a Simple Account Based Pension subject to the contribution rules which can be found here on our website.
What if a second Member has not commenced a Transition to Retirement Simple Account Based Pension
Note that if there are 2 members and the second member remains in accumulation mode (ie not Simple Account Based Pension mode) this members share of the SMSF still attracts tax at 15%. Of course they too can commence a Simple Account Based Pension for their benefit reducing the tax rate to NIL on their share of the Fund also.
Effectiveness of Strategy When you commence a Transition to Retirement Simple Account Based Pension between the age of 55 and 60 the income you draw is taxable at your personal tax rate. It is only tax free if you are above 60. However no tax is payable on the UDC portion of the income drawn and a 15% tax rebate is applied to the income. Given this some tax may be payable on the Simple Account Based Pension income if commenced before 60. Commencing a Simple Account Based Pension prior to the age of 60, whilst you are still working should be carefully considered as it does not always produce a tax benefit. This is because the income drawn is taxed on top of your salary creating a larger tax bill which may well offset the NIL tax rate your SMSF achieves when you commence the Simple Account Based Pension. To the extent that this strategy is combined with a salary sacrifice strategy the tax benefits increase substantially and may make this a viable strategy for those aged between 55 and 59 (see below). Combining a Transition to Retirement Simple Account Based Pension with a Salary Sacrifice Arrangement
A Transition to Retirement Simple Account Based Pension works extremely well with a Salary Sacrifice Strategy. This dual strategy operates as follows:
Strategy
> Say you are on a salary of $100,000 and have $1.0 million in super earning 4% pa in franked income
> You salary sacrifice the maximum you can at age 55, namely $50,000
> You commence a TRAP Strategy drawing the minimum you require to live off, say $30,000
> The tax rate of your SMSF drops to NIL
Tax Saving
The tax savings adopting this strategy are as follows:
| Salary Package | Strategy in
Place | No Strategy
in Place |
| - Salary | $50,000 | $100,000 |
| - Simple TRAP | $30,000 | $0 |
| --------------- | --------------- |
| Salary Package | $80,000 | $100,000 |
| ========= | ========= |
|
| Tax Saving from Strategy | Strategy in
Place | No Strategy
in Place |
| - Tax on Salary (& TRAP) | ($17,550) | ($24,950) |
| - Tax on Salary Sacrificed Super | ($7,500) | $na |
| - Tax on SMSF Earnings | $0 | ($6,000) |
| - Tax Rebate on TRAP Income | $4,500 | ($na) |
| - Franking Credits Refund | $17,050 | $17,050 |
| --------------- | --------------- |
| Tax Payable per annum | $3,500 | $13,900 |
| ========= | ========= |
The above Strategy Savings Total $10,400 per annum.
Commencing a Transition to Retirement Simple Account Based Pension
When you are ready to commence a Transition to Retirement Simple Account Based Pension ESUPERFUND will attend to all aspects of the Simple Account Based Pension setup process for you. You do nothing.
Free Setup
It is FREE to establish a Transition to Retirement Simple Account Based Pension.
Apply Now
To establish a Transition to Retirement Simple Account Based Pension (appropriate if you are over 55 and working) simply visit our Online Application Form here.
General Advice Warning
The contents of this website are of a general nature only and have not been prepared to take into account any particular investor's objectives, financial situation or particular needs. Where this publication refers to a particular financial product then you should obtain a Product Disclosure Statement (PDS) relating to that product and consider the PDS before making any decision about whether to acquire the product. We also recommend that you should seek professional advice from a financial adviser before making any decision to purchase any financial product referred to on this website. While the sources for the material are considered reliable, responsibility is not accepted for any inaccuracies, errors or omissions.