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How is Your Pension taxed?

As of 1 July 2017, members who receive a Transition to Retirement Income Stream (TTR) will no longer receive the generous tax concessions upon the assets that are used to fund their pension.  These are by far the biggest changes to superannuation income streams in 10 years. Understanding how these changes affect you and your pension is crucial to make sure you are not being taxed unnecessarily, and can even help inform you on how to minimise your tax.

Preservation Age and Conditions of Release

Self-Managed Super Funds generally use two types of superannuation income streams, a TTR or an Account Based Pension (ABP), each now having different tax treatment on the income of the fund. To be entitled to a superannuation income stream two things need to occur: preservation age is reached and a condition of release has been met. The definitions for both are as follows.

Preservation age

Members born on or before 30 June 1960 have a preservation age of 55, however this raises by a year to a maximum of age 60 for each after 1960.  So a member born 25 November 1961 now has a preservation age of 57, and a member born 25 November 1963 now has a preservation age of 59.

Condition of Release

A condition of release is event or age-based, and is summarised below:

When combined with preservation age, the condition of release will determine the superannuation income stream that is available to the member. A change in conditions can certainly mean tax savings to the fund, so long as you act upon them. To see how changes in your own personal conditions can affect your release, here are a few scenarios to look at.

Scenario 1: aged 59 and still working

Under this example a member can only take a TTR and draw down between 4% and 10% annually from their member balance, however the income in the fund is taxed at 15%.

Scenario 2: aged 59 and retired

Under this example a member could take an ABP because of retirement and draw down between 4% and 100% of their member balance, and the income of the fund is tax exempt.

Scenario 3: aged 60 and taking a TTR but then ceases work

Under this example a member is already drawing a TTR and has satisfied a new condition of release that entitles them to transfer to an ABP because of ceasing work, therefore making the income of the fund tax exempt from the date of changeover.

So what is required?

When a new condition of release has been met it is critical to get the new pension documents correct to reflect the wishes of the member. These include: notice to the trustee to cease the existing pension; notice to the trustee that the member has met a new condition of release; notice to the trustee to commence a new pension using the updated condition of release; and a request for a reversionary pension.

Poorly recorded documentation (or no documentation at all) is what the ATO is clamping down on, and from 1 July 2018 any changes to existing pensions or commencement of new pensions will need to be recorded quarterly by the fund. The legislative changes have made superannuation more complex than ever and it has never been more important to speak with a specialist in superannuation.

To have your retirement and pension needs simplified, get in touch with McKinley Plowman on 9301 2200 or visit https://www.mckinleyplowman.com.au/services/wealth/retirement-planning/

written by:

McKinley Plowman