A Transition to Retirement Pension (TRAP) is an income stream that you receive from your SMSF when you are aged between Preservation Age and 64 and NOT "Retired". It enables individuals to gradually move to retirement by accessing a limited amount of super.
TRAP is commenced previously but the member has met a Nil condition of release afterwards
A Transition to Retirement Pension (TRAP) will enter the tax-free retirement phase (i.e. functions in the same way as SABP) if the member has satisfied a condition of release with a nil cashing restriction:
- Meets the condition of release 'Retirement' and notifies the trustees;
- Meets the condition of release 'Terminal Illness condition' and notifies the trustees
- Meets the condition of release 'Permanent Incapacity' and notifies the trustees; or
- Attains age 65 (with no need to notify the trustees)
If your TRAP enters the tax-free retirement phase prior to 01 July 2017, the TRAP reform discussed below does not apply to you. If your TRAP enters the tax-free retirement phase after 01 July 2017, the TRAP reform only applies for the period between 01 July 2017 and the date you meet the Nil condition of release.
Entering the tax-free retirement phase brings the tax exemption, but also brings the pension within the transfer balance cap regime. Therefore, careful planning ahead of time is a required to avoid the breach of the transfer balance cap.
1. Enter the tax-free retirement phase on 65th Birthday
In this case your TRAP will enter the retirement phase automatically on your 65th birthday. No notice/document is required, and you can continue to work beyond age 65.
2. Enter the tax-free retirement phase on the Retirement Date
In this case, you must meet the definition of "Retirement" and sign a “Retirement Declaration” to trigger the conversion. The definition will vary depending on when you cease work. Your TRAP will enter the retirement phase on the Retirement Date once you notify the trustees of your retirement.
If you cease employment between Preservation Age and 59, "Retirement" means that at the time you ceased employment you never intended to work again either on a full-time or part-time basis (defined as more than 10 hours per week). A "Retirement" Declaration must be signed if you cease employment between Preservation Age and 59 and can be found here.
If you cease employment after age 60, "Retirement" means you simply cease your employment. In this case the intention to return to the workforce is irrelevant. The definition of retirement in this case is less stringent than for those under 60. A "Retirement" Declaration must be signed if you cease employment after age 60 and can be found here.
Importantly your retirement must be “real” in order to convert your TRAP to SABP (e.g. reducing your working hours with the same employer without actually ceasing your employment would not meet the definition of "Retirement" discussed above).
As soon as you retire from the workforce and you are satisfied that the definition of "Retirement" can be met, please complete, sign and forward a copy of your “Retirement Declaration” to ESUPERFUND.
Superannuation Reform – Removal of Tax Exemption benefits
Transition to Retirement Pensions (TRAP) are currently available to assist individuals to gradually move to retirement by accessing a limited amount of super. Prior to 01 July 2017, individuals receiving a TRAP receive tax-free earnings on the super assets that support it.
From 01 July 2017 the tax exemption on earnings from assets supporting Transition to Retirement Pensions (TRAP) is removed. These earnings are instead taxed concessionally at a rate of up to 15%, which is taxed in a similar way as Accumulation accounts. This change applies irrespective of when the transition to retirement pension commenced.
Please see the table below summarising tax rates associated with TRAPs.
|Tax Rates for TRAP Account
(from 01 July 2017)
(Asset Owned Under 12 Months)
(Asset Owned Over 12 Months)
(Age 60 or over)
||Tax Free (No change)
(Preservation Age to 59)
Transitional CGT Relief
Where individuals have a Transition to Retirement Pension (TRAP) prior to 01 July 2017, the fund may be eligible for the transitional CGT Relief.
The purpose of the CGT relief provisions is to provide temporary CGT relief for accumulated capital gains on assets which would have been exempt but for the introduction of the TRAP earnings taxation measure. The relief will ensure that CGT is only payable (on the sale of these assets after 1 July 2017) on capital gains accrued from 1 July 2017. Please click here for detailed explanation and some worked examples.
Implications of the Reform
From 01 July 2017 earnings on assets supporting the TRAP become taxable. In addition, personal tax is also payable on the "Taxable" portion of your Pension Withdrawals if you are aged between Preservation and 59
Considering the above, commencing a TRAP might no longer be beneficial to individuals from 01 July 2017.
Benefits of commencing TRAPs
Individuals are able to access super benefits from the SMSF (subject to the annual Minimum and Maximum requirements) to meet their living expenses while still working.
Drawbacks of commencing TRAPs
- Annual compulsory withdrawals must be made to comply with the SIS payment standards.
- Tax is payable on the "Taxable" portion of Pension Withdrawals if withdrawals are accessed between Preservation age and 59
- Super benefits accessed might not be able to be returned to SMSF due to the reduced contributions cap
- More paperwork is involved
Commutation of Transition to Retirement Pensions (TRAP)
If you decide to fully commute (i.e. cease) your TRAP on 30 June, please contact ESUEPRFUND. Please note that once your TRAP is ceased, you cannot make any pension withdrawals from your SMSF.
The pension commutation represents an accounting entry only and no action is required from you apart from signing the associated pension commutation documentation.
You can recommence a pension later by simply submitting a pension application via your client portal. The pension type (i.e. TRAP / SABP) will be re-determined based on your age and retirement status as at the new pension commencement date.
This service is absolutely FREE! This is unprecedented in today's market.
Seek Professional Advice from a Financial Adviser
ESUPERFUND is a no advice model and does not provide financial advice to clients. We recommend that you seek professional advice from a financial adviser. A licensed financial adviser will consider your personal situation and make a recommendation suitable to your particular financial needs.
It should always be remembered that Trustees are legally responsible for all the decisions made even if you obtain advice from a Financial Planner. Whilst a Financial Professional can provide advice and assistance you are ultimately responsible for the Fund.