Transition to Retirement

A Transition to Retirement Pension is an income stream from your SMSF that you can commence if you’ve reached preservation age (currently 55) and are still working. With a Transition to Retirement you may be able to reduce your working hours without reducing your income. This can be done by topping up your part-time income with a regular ‘income stream’ from your SMSF.

Until recently, you could only access your SMSF balance once you turned 65 or retired. This meant it was difficult to reduce your working hours and still maintain your standard of living. Transition to Retirement allows you to withdraw some of the your SMSF balance annually.

How does a Transition to Retirement work?

You will have two accounts within your SMSF. Once you reach preservation age, you can elect to have a Transition to Retirement income from your SMSF.

If you’re 55 you have to take an income of between 4% – 10%  (3% minimum for  the year 2013) of this Transition to Retirement balance. The first year of the Transition to Retirement is calculated on a pro-rata basis, using the days in the year. The percentage of income withdrawn from the balance can be compounded within the same year. See an example below:

Example:

A Trustee reaches the preservation age of 55 and wishes to commence a Transition to Retirement and he has $100,000 in the SMSF account. He withdraws 10% from the balance, leaving $90,000 in the Fund. In the same year, he can withdraw another 10% of the remaining balance of $90,000.

How do you activate a Transition to Retirement?

The Trustees of the SMSF are responsible for starting the Transition to Retirement. When you start the Transition to Retirement, you must minute your decision (here is a template for these minutes)

Transition to Retirement template

and send a copy of the minutes to Superannuation Warehouse via email.

Tax consequences in the SMSF

Starting from 1 July 2017, all Transition to Retirement income will be taxed at a rate of 15%. This is new change made in the 2016-2017 Federal Budget.

Tax on the Transition to Retirement income received from the SMSF

If you’re over 60, the income you receive in the form of pension payments from your SMSF is tax free in your hands. If you’re between the ages of 55 and 60, this Transition to Retirement income should be included in your personal taxable income.

Payments cannot be lump sums

You just have to ensure that you withdraw at least the minimum specified percentages as Transition to Retirement payments over the year.

Minimum Drawdown Amount

Depending on your age, you are obliged to withdraw a minimum amount from the Transition to Retirement balance each year. At the start of the year, calculate the market value of the Transition to Retirement. The minimum draw down is dependent on your age. See the preservation age table below for the percentages.

55 – 64 4%
65 – 74 5%
75 – 79 6%
80 – 84 7%
85 – 89 9%
90 – 94 11%
95+ 14%

Due to the global financial crisis, these minimums were temporarily halved for the financial years between 2009 and 2011. This was referred to as minimum pension drawdown relief.

PAYG Registrations

An SMSF must register for PAYG when a Transition to Retirement is started. You can download the ATO guidance on TTR for SMSF’s below:

TTR ATO Guidance

Access the ATO website to view the PAYG withholding calculator.

You can view the sample form for the PAYG Payment Summary – Pension Income Stream and the Instruction Guide on how to complete the PAYG form as described by the Tax Office. To download the PAYG Summary – Superannuation Income Stream form, please click here.

You can also view our example for the PAYG Payment Summary and the Calculation for the tax withheld.

More information

To find out more about Transition to Retirement income streams, visit the ATO website by clicking here. Alternatively, you can watch the video below.

 

Q: If I am currently in a TTR, do I need to do another Minute when I enter full pension?

Our understanding is that once a Member has satisfied a condition of release, the TTR will automatically revert to an Account Based Pension provided that the Trust Deed or the Minutes to Commence  a TTR  supporting the pension provide for this. The Minutes to Commence  a TTR template above allows for the automatic reversion of a TTR to an Account Based Pension without the need for another minute.

  • Mark

    SW regarding the taxable component of the Transition to Retirement Fund (TTR Fund). If I
    take $25,000 (from the TTR fund ) and remember I originally paid 15% on when I first when I put it into the SMSF then question is what tax will I pay on it if I earn $75,000 for the year plus that $25,000 on top (total of $100,000). Is the tax already paid on the $25,000 so don’t need to
    pay anymore ? or I do I have to take off the 15% from the tax I need to pay on
    the extra $25,000 (taxed at circa 38%) I get from the TTR fund making the tax to pay on it a further 23%.
    thanks Mark

    • superannuationwarehouse

      Mark,

      The taxable component of the TTR needs to be added to your personal taxable income. You will then get a 15% tax credit for the tax already paid in your personal capacity.
      You can issue a PAYG withholding tax form from the SMSF, noting the tax relevant to the PAYG payments. This form is on the TTR page above.
      The good news is that, once in pension mode, all payments from the SMSF is tax free and do no have to be disclosed in your personal tax return. It is a tax haven in Australia.
      Lastly, when the TTR retirement start, its sensible to note the components between taxable and tax free to assist with the tax above. You can use the components from the last Member statement we would have sent you that comes with the financial statements. After tax money (non-concessional contributions) is what makes up the tax free component. So you will not be taxed on this.

      Trust this answers your question.
      Hein

  • Jay Lee

    Do you mean no matter whether there is tax withold, once TTR started, the SMSF needs to register PAYG and generate PAYG summary to record those e.g minimum withdrawal
    and lodge to the ATO? Even though tax withold is NIL? Many thanks

    • superannuationwarehouse

      An SMSF needs to register for pay as you go (PAYG) withholding tax as soon as it knows tax is to be withheld from income streams or lump sums. Essentially, if the member is eligible for income stream payments and under 60, he needs to withhold tax on the taxable component.

      The amount of the withholding tax can be worked out based on the ATO tax tables. Where an SMSF registers for PAYG, it would be required to lodge quarterly activity statements stating the withholding amount. At the end of the financial year, the SMSF also needs to lodge an annual PAYG payment summary and an PAYG payment summary statement.

      In terms of your question on Nil tax withholding, if the member is over 60, he doesn’t need to pay tax on the taxed element of the taxable component, the PAYG withholding tax is not applicable. However, in most circumstance, if the member is under 60, it is unlikely that the tax withholding will be Nil because the taxable component of the pension payment is subject to tax.

      For more information, refer to:
      https://www.ato.gov.au/super/self-managed-super-funds/in-detail/establishing-and-maintaining/paying-benefits-from-a-self-managed-super-fund/?page=17

      • Jay Lee

        Thanks Mark, although for a member over 60 the withholding tax is not applicable, do we still need to lodge a NIL PAYG summary to indicate a income stream payment during the financial year to the member who over 60?
        Many thanks.

        • superannuationwarehouse

          Jay,

          If the member is over 60 and the withholding tax is not
          applicable, you do not need to lodge a NIL PAYG summary to the Tax Office.

          Trust this answers your questions.

        • superannuationwarehouse

          Jay,

          If the member is over 60 and the withholding tax is not
          applicable, you do not need to lodge a NIL PAYG summary to the Tax Office.

          Trust this answers your questions.

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