There are a few disadvantages associated with Transition to Retirement income streams that one should be aware of prior to implementing such a strategy.
A superannuation Transition to Retirement (TTR) income stream pension is commenced using some or all of your superannuation accumulation balance.
Transition to Retirement Disadvantages
When discussing superannuation transition to retirement disadvantages, both disadvantages associated with transition to retirement pensions and a transition to retirement strategy should be addressed.
A transition to retirement strategy includes the commencement of a transition to retirement pension, but a transition to retirement pension can be started without implementing a full transition to retirement strategy.
Let me explain.
What is a Transition to Retirement pension?
A transition to retirement pension is an income stream that you have chosen to commence using all or some of your superannuation accumulation account balance. You are able to do this even if you are still working, provided you have reached your superannuation preservation age:
|Date of Birth||Preservation Age|
|Prior to 1 July 1960||55|
|1 July 1960 – 30 June 1961||56|
|1 July 1961 – 30 June 1962||57|
|1 July 1962 – 30 June 1963||58|
|1 July 1963 – 30 June 1964||59|
|On or After 1 July 1964||60|
Transition to Retirement Pension Disadvantages
A superannuation Transition to Retirement pension requires you to withdraw an income from the pension each financial year of between 4% and 10% of the account balance; no more, no less. This is calculated on the pension account balance as at 1 July of each year. If the pension started part way through a year, the calculation can be pro-rata.
The disadvantages of transition to retirement pension income streams are as follows:
Depleting Your Super Balance:
You are accessing your superannuation savings prior to retirement and therefore depleting your retirement balance. If you are not replenishing your superannuation accumulation balance with at least the same amount as is being withdrawn in pension payments, then you may find you have inadequate savings to achieve your retirement objectives once you permanently retire.
Tax on Earnings:
From 1 July 2017, all earnings (including capital gains) received from assets supporting a Transition to Retirement pension will be taxed at 15%. Capital gains tax (CGT) will effectively reduce to 10% if the asset sold was owned for longer than 12 months, as a 1/3rd CGT discount will apply. Prior to 1 July 2017, all earnings received from assets supporting a Transition to Retirement pension were received completely tax free, just like an ordinary account based pension.
Tax on Income Under 60:
If under age 60, the taxable portion of your transition to retirement pension income will be taxed at your marginal tax rate, less a 15% offset (except taxable (untaxed) component – taxed at MTR, no offset). The taxable portion is made up of the taxable component within your balance. You can find out your taxable component balance by contacting your superannuation provider. The tax-free component portion will be received tax free. All pension payments must be made proportionately from the taxable and tax free components. For example, if 80% of your balance is made up of the taxable component and 20% of the tax-free component and you were to receive a pension payment of $20,000, then $16,000 of that payment would come from the taxable component and $4,000 from the tax free.
If you do start a Transition to Retirement pension, but will continue to make contributions to super (or your employer will on your behalf), then you will be required to have an accumulation account and a transition to retirement account, as contributions are unable to be made to a pension account. Having two accounts may increase the cost of maintaining your retirement savings and increase the complexity of your financial situation.
Transition to Retirement Strategy Disadvantages
A superannuation Transition to Retirement strategy involves salary sacrificing as much as possible into superannuation and then drawing an income from a Transition to Retirement pension to supplement your remaining salary, so that you can still afford to cover your personal living expenses. The advantage of this is that less of your salary is being tax at your marginal tax rate (due to being salary sacrificed) and is being replaced with (hopefully) tax free income from super. However there are some problems and disadvantages.
Note: I use the term salary sacrifice, but this can also mean personal concessional (deductible) contributions (i.e. self employed contributions).
All of the Above Applies:
All of the Transition to Retirement pension disadvantages, noted above, also apply to a Transition to Retirement strategy as well.
Tax on Contributions:
As a Transition to Retirement Strategy involves salary sacrificing a portion of wage into super. All contributions are low tax super contributions and incur 15% contributions tax. An additional 15% contributions tax is payable on salary sacrifice contributions for high income earners.
Under Age 60:
For people over age 60, all Transition to Retirement pension income is received tax free (except taxable (untaxed) component – taxed at MTR, less 10% offset). Therefore, in most cases, a person over age 60 is salary sacrificing income that would otherwise be taxable at their marginal tax rate and replacing it with tax free income from a transition to retirement pension. However, for people under age 60, only the tax free component portion of the income will be received tax free. So, if a person, under age 60, has a superannuation balance consisting predominately of the taxable component, a Transition to Retirement strategy generally provides no benefit (from 1 July 2017).
Calculate your own preservation age here.
Can You Stop a Transition to Retirement Pension?
You are able to stop a Transition to Retirement Pension at any time. This is done by rolling the balance of the pension back to accumulation phase. You just need to ensure that the minimum pension income payments have been received for the financial year that the roll back occurs, prior to transferring the balance back to accumulation phase. If you decide to stop the Transition to Retirement Pension part way through a financial year, the minimum pro-rata pension payment needs to have been met. For example, if the minimum pension payment over a full year was calculated as $20,000 (assuming a balance of $500,000 and the transition to retirement pension payment factor of 4% p.a.) and you decided to stop the pension after 3 months (25% of the year), then you will need to have ensured that at least $5,000 (25%) in pension payments has been received.
Transition to Retirement Changes 2017
There is only one change being made to Transition to Retirement from 1 July 2017. That is, the earnings within the account will now be taxed in the same manner as an accumulation account – 15%, reduced to 10% for capital gains received from assets owned longer than 12 months.