A number of factors should be considered when a member is planning to convert a Transition to Retirement Income Stream (TRIS) to an Account Based Pension (ABP)
Let’s first briefly summarise the features of each type of pension.
An Account Based Pension is a retirement income stream which a member can commence from the Unrestricted Non Preserved Balance of their superannuation benefit once they have met a condition of release of which the most common is “Retirement”.
A Transition to Retirement Pension is a pension that allows a member to supplement their income by allowing them to access some of their superannuation benefit once they reach their respective preservation age. This is currently 57 years of age.
Post 1 July 2007 there have been a number of changes to the way in which pensions are administered and the associated rules that must be followed. One of which relates to the introduction of the concept referred to as “retirement phase”.
What is Retirement Phase?
From 1 July 2017 a $1.6m transfer balance cap was introduced. This cap limits the amount a superannuation fund member can have in pension phase. Only a pension that is considered to be in “retirement phase” counts towards the $1.6m transfer balance cap.
Pensions that are included as a retirement phase income streams include all pensions except for the following;
Transition to retirement income streams (TRIS) where the member has not satisfied retirement, reaching the age of 65, terminal medical condition or permanent incapacity condition of release
Deferred superannuation income streams where the recipient has not satisfied retirement, reaching the age of 65, terminal medical condition or permanent incapacity condition of release.
Income streams where a commutation authority has been issued in relation to an excess transfer balance that a trustee has failed to comply with within the required 60 day period
If a member’s income stream is one of the exclusions above, it is considered to be in accumulation phase for the purposes of the earnings tax exemption and the transfer balance cap. However, it is still considered an income stream for other purposes, including the proportioning of tax components and the taxation of payments from the income stream.
TRISs & Retirement Phase
Due to these changes, this creates two separate types of TRIS’s:
A Non-Retirement Phase TRIS, and
A Retirement Phase TRIS
A TRIS will be considered a retirement phase income stream where the member has not only met preservation age, but either attained age 65 or met the retirement, terminal medical condition or permanent incapacity conditions of release and notifies the fund trustees.
Typically in an SMSF the fund members will typically be the same people as the trustee or directors of the trustee company. Members of a fund in receipt of a TRIS must notify the SMSF trustee in writing in order to obtain the pension exemption apart from those members who have attained the age of 65.
Further to this simply meeting a condition of release is not enough to allow a TRIS to enter retirement phase. It should be noted that the above required actions should ideally be reflected in the funds trust deed.
NOTE FOR SMSF SERVICE PROVIDER – Within your SMSF accounts, we recommend using the following naming convention for Non-Retirement and Retirement TRIS’s to avoid confusion between the two:
Non-Retirement TRIS – TRIS
Retirement TRIS – TRIS in Retirement
Converting a TRIS to an ABP
Over the last 12 months there have been various debates regarding whether a TRIS can convert to an Account Based Pension (ABP) where a member turns 65 or satisfies a relevant condition of release.
For clarity, the ATO recently released Guidance Note, GN 2019/1 which confirms that a TRIS cannot automatically convert to an ABP.
Where a member has a TRIS in place and satisfies a condition of release, the pension will become a retirement phase TRIS, not an ABP.
A TRIS can only be converted to another kind of pension if the pension is commuted and a new pension is commenced.
Where this type of transaction takes place, it is prudent to ensure relevant documentation is prepared and signed by the trustees (pension commutation minutes and pension commencement documents).
Refer to the last paragraph of this blog for further information regarding how SuperAA can support you in obtaining the relevant documentation required for the fund’s members.
From 1 January 2015, any new ABP commenced will be subject to deeming rules under the Income Test for Centrelink and The Department of Veterans’ Affairs (DVA).
Prior to the new rules being introduced ABPs would receive a deductible amount. The deductible amount represented what is considered a return of the member’s capital and did not count towards the Income Test. If annual payments made by a member were less than the deductible amount then no income was assessed.
Under the new rules a member’s pension is subject to the deeming rules that are used by the Department of Social Services (via Centrelink) for income test calculation purposes. This means that a member’s ABP is assumed to be earning a certain annual rate of return, regardless of the rate of return they are actually earning.
The deemed income derived from the members ABP is assessed against the Income Test which in turn may affect the members annual age pension entitlements received from Centrelink.
Where a TRIS or ABP is commuted and a new pension is commenced, the new deeming provisions will apply.
Where a Non-Retirement Phase TRIS changes to a Retirement Phase TRIS, a new pension is not considered to have commenced, meaning if the pension was commenced prior to 31 December 2014, the old rules will apply.
Differences between a Retirement Phase TRIS and an ABP
In short, there are no differences!
A Retirement Phase TRIS and an ABP both have the exact same elements.
Both pensions must meet the annual minimum, there is no 10% max and both count towards a members transfer balance cap. They are identical in every way.
This has resulted in industry feedback requesting why such a rule would be introduced. Most would argue that it would be easier in many regards if a TRIS did automatically convert to an ABP when the member satisfied the relevant condition of release, thus removing the need for a retirement phase TRIS in the first place.
This would also make it far easier for accountants and advisers alike to explain this to their clients, the trustees.
Super AA Pension Documentation
SuperAA via our documentation service provides a range of income stream documentation as part of our SMSF service, including documentation to enable:
Reset of a TRIS to an account based pension;
Election to convert a TRIS in Accumulation Phase to a TRIS in Retirement Phase; and
Changes to a pension reversion nomination – add, remove or change the reversion