Commuting a Transition to Retirement Income Stream
There are many reasons why people continue to work past age 55. Some need the money, but others enjoy the mental stimulation and social interaction that a job offers. Some will slowly reduce their working hours.
The Australian Government has made it possible to keep working while drawing down some of your super benefits. The policy, called, ‘transition to retirement’, allows employees to supplement their salary and maintain a comfortable lifestyle. This policy also allows employees to save tax and boost their super benefits before they retire.
A transition to retirement income stream (TRIS) is where a super fund member who has reached their preservation age (e.g. age 56 for someone born before 1 July 1961) can generally withdraw some of their superannuation entitlements as a pension without having to retire from the workforce.
With a TRIS the member is required to withdraw annual pension payments of between 4-10% of their superannuation fund balance. The member is then taxed on the TRIS payments at their marginal tax rate but allowed a 15% tax offset. This may result in the TRIS income being taxed at a net rate of 32% (see Tax Tip 72).
To avoid this tax liability the TRIS could be commuted by way of ‘internal roll-over’, whereby all of the member’s pension account-balance is rolled-back into the accumulation phase. Once that is done the member could then pay the taxable component of a lump sum benefit up to the low-rate cap of $195,000 for 2015-16 which is tax free. To use this strategy the member must meet one of the SIS Act conditions of release for their super such as retirement, aged over 65, etc.