Transition to Retirement Pensions (TRP) can help ease into retirement
The concept of retirement has changed over the years for many Australians. In the past it was common to reach a certain age, retire completely and go on an age pension and/or cash out your superannuation. In more recent times the use of income streams in retirement has become more common as more consumers have larger superannuation savings and can make the most of a concessional taxation environment. Employees are also looking for more flexibility when nearing retirement as other health and lifestyle factors become more important. These people may wish to cut back their hours or work part time instead of ceasing work completely.
A Transition to Retirement Pension (TRP) option allows members to draw an income from their superannuation if over preservation age and still working. A TRP operates like a normal 'Account Based Income Stream' (ABIS) where a minimum annual drawdown requirement applies. For those aged under 65 the minimum is currently 4% of the balance. However there is a maximum drawdown amount allowed each year of 10% and no commutations (lump sum withdrawals) are permitted. The maximum drawdown and lump sum restrictions are removed once the member permanently retires or reaches age 65.
From a Government Income Support point of view, the total amount is assessed under the assets test. Currently under the income test the amount drawn less a Deductible Amount (DA) which represents the member's capital, is assessed and added to any other assessable income. To determine the DA the pension purchase price is divided by the member's life expectancy. The DA stays fixed unless the abovementioned restrictions have been removed and commutations are made. ABIS and TRPs commenced from 1 January 2015 will be assessed under the deeming provisions.
With regard to taxation, any income received by superannuants who have reached age 60 is tax free just like they are from any 'taxed' super fund or income stream. For those aged 55 to 59, the taxed component within the pension payment is assessable income however a 15% 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 a TRP are tax free to the fund.
It is also worth noting that the member is not obliged to convert all of their superannuation benefit to a TRP. Other accumulation benefits can still be held by the member simultaneously. This is particularly important for continuing employer and/or personal contributions.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 an option to help make the transition smoother.