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 The percentage of income withdrawn from the balance can be compounded within the same year.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:
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%|
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.
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.
To find out more about Transition to Retirement income streams, visit the ATO website by clicking here. Alternatively, you can watch the video below.
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.