What portion of a transition to retirement (TTR) Pension or transition to retirement income stream (TRIS) counts towards the Transfer Balance Cap?

A TTR Pension is a pension commenced by an individual between their superannuation Preservation Age and age 65 while they are still working.

A TTR Pension is a non-commutable pension income stream whereby the recipient of the income stream is required to draw an income of between 4% and 10% of the pension balance at 1 July of each year, or at the commencement date of the pension.

Unlike a standard account based pension (aka allocated pension), all earnings received from investments within a TTR Pension account from 1 July 2017 are taxed at up to 15%. Earnings within a standard account based pension are received completely tax free.

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Specifically, earnings within a TTR Pension account are taxed at the same rate as a superannuation accumulation account. The taxation of earnings should not be confused with the taxation of pension income or drawings.

TTR Pension and the Transfer Balance Cap

The two main ‘phases’ of superannuation are Accumulation phase and Pension phase.

Accumulation phase is where retirement savings are stored and contributed to up until some or all of the funds are used commence an income stream upon retirement or transition to retirement.

Pension phase is where Accumulation account savings are used to commence an income stream by someone in retirement or transitioning to retirement.

The introduction of the Transfer Balance Cap was designed to reduce the tax concessions received by wealthier individuals by having their retirement benefits held within pension phase, by limiting the level of funds that can be held in this tax free environment. To further reduce the tax concessions, earnings within a TTR Pension began being taxed at the same rate as Accumulation phase from 1 July 2017.

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The Transfer Balance Cap at 1 July 2017 is $1.6 Million. This represents the maximum amount that can be transferred from Accumulation Phase to commence a pension income stream (including defined benefit pensions and annuities), or the maximum that can be held in existing pension accounts (including defined benefit pensions and annuities) on 1 July 2017.

The Transfer Balance Cap is indexed in line with CPI in increments of $100,000.

By limiting the amount that can be transferred from Accumulation accounts to Pension accounts, the level of funds that receive tax free earnings is limited too, as any amount in excess of the Transfer Balance Cap must remain in Accumulation phase of superannuation, or risk Excess Balance Transfer Cap Tax.

TTR-Pension-TRIS-Balance-Transfer-Cap

However, unlike all other pension accounts and annuities, transition to retirement (TTR) pension balances are not counted towards the Transfer Balance Cap and will not result in Excess Transfer Balance Tax on Notional Earnings. The reason for this is because all earnings within a TTR Pension are taxed at exactly the same rate as Accumulation accounts from 1 July 2017 anyway. Therefore, no additional tax concessions are received for transferring these funds from Accumulation phase to TTR Pension phase.

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Chris Strano

Chris Strano is a specialist independent superannuation author for SuperGuy.com.au - one of Australia's leading superannuation information resources.

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