Despite a pessimistic view by some, the reasons for having a transition to retirement income stream have not changed, it’s just that the investment income earned by the superannuation fund will be taxed at 15 per cent from 1 July 2017.
For many, that result is better than investing the same amount as an individual being taxed at personal rates of up to 47 per cent plus the Medicare levy.
A TRIS provides many advantages even after the changes to superannuation take place from 1 July 2017. The most important is probably access to preserved benefits prior to meeting the “retirement condition of release”.
There’s also the ability to receive a tax-advantaged regular payments from superannuation and the concessional rate of tax on the balance held by the fund.
In addition, a TRIS can be complemented with salary sacrifice arrangements for anyone who has met their preservation age, currently age 56. What’s not to like about that?
A TRIS is an income stream payable from a superannuation fund which has a number on restrictions placed on it, compared with an account based income stream.
A TRIS has the following features:
- The minimum amount of income paid under the TRIS must be no less than four per cent of the account balance for the financial year.
- A cap equal to 10 per cent of the account balance each financial year exists on the maximum amount that can be paid.
- The amount of the TRIS that is taxed in the hands of the individual is eligible for a 15 per cent tax offset.
- Once the pensioner reaches age 60 the TRIS is tax-free on receipt.
When drawing down a TRIS, the non-preserved components are withdrawn first before drawing preserved components.
A prohibition exists on withdrawing preserved amounts as lump sums, however, non-preserved components can be withdrawn as lump sums at any time.
On the death of the pensioner the amount left in the TRIS account can be paid as a reversionary income stream to dependants.
A TRIS can be returned to accumulation phase of super at any time, if required.
It is not possible to add contributions or rolled over benefits to the balance of a TRIS.
A comparison of the use of a TRIS before and after the commencement of the changes on 1 July 2017 shows that while there is a reduction of the amount available to provide the TRIS year by year, it still provides sound advantages. This can be illustrated in the following case study.
Natasha is 57 and plans to work full-time until she is 65. She commences a TRIS on 1 July 2017 with the preserved component of her superannuation balance of $800,000.
The minimum TRIS income will be $32,000 and the maximum will be $80,000. The long-term earnings rate is 7.1 per cent a year before tax.
The impact of paying tax on the income earned on investments that support the TRIS over the eight years that Natasha plans to receive the income stream is $93,944.
This will include the reduction in the balance year by year to take into account the lower carry-forward balance and the lower amount of minimum pension that can be withdrawn from the fund.
The amount accumulated in the fund after eight years would be $1,052,975 if no tax was payable by the fund and $959,031 if 15 per cent tax was payable by the fund.
While the amount of tax payable by the fund does make a difference in the balance available to pay the TRIS year by year it may provide a better alternative than investing the $800,000 in the name of the individual.
If they were able to earn 7.1 per cent long-term on the balance ($56,800 a year), the amount of tax payable would be $10,007 (excluding Medicare and other tax offsets) for the 2017-18 financial year compared to $8,520 payable by the fund on the same amount of income.
Commencing a TRIS from 1 July 2017 will continue to have advantages. It will provide access to preserved benefits, a regular income stream that is tax effective and concessional rates on the tax payable by the superannuation fund.