The superannuation reforms applying from 1 July 2017 made a number of changes impacting transition to retirement income streams and their use by retirees.
A transition to retirement income stream (TRIS) is an income stream a retiree can access once they attain preservation age, but before they meet another condition of release like retiring.
Prior to 1 July 2017
Earnings on assets supporting the income stream were tax free as long as a minimum pension payment was paid in form and effect each financial year. There was also a maximum annual payment limit of 10% of the account balance at 1 July (or commencement).
Pension payments made from a TRIS are subject to the same tax treatment as payments from a normal account based pension (ABP). Namely they were generally tax free over age 60, and the taxable component was taxable at the individual's marginal tax rate with a 15% tax offset.
A TRIS was classed as a non-commutable income stream and, unless the interest contained any unrestricted-non preserved monies, lump sum payments or partial commutations could not be made. Despite this, it was still possible to elect to treat one or more payments from a TRIS as a super lump sum for tax purposes. This was used to take advantage of tax concessions available for members aged between preservation age and 60 years old by accessing the low rate cap. Super lump sums up to this cap ($195,000 in 2016/17) are tax-free. These payments were also allowed to count towards meeting the minimum pension standards.
When the pensioner 'retired' or met another relevant condition of release it was often the case that the TRIS was converted to an ABP. This was done to remove the commutation restrictions and maximum payment limits faced by a TRIS. It was also the view of some in the industry that the pension documentation could allow for this to happen without the need to commute and re-commence the income stream once a condition of release was met.
From 1 July 2017
A TRIS will default to 'non-retirement phase' status from 1 July 2017. The main change being that earnings on assets supporting this non-retirement phase TRIS will not be tax free. A non-retirement phase TRIS will not be eligible to claim ECPI in the annual return.
The TRIS will be subject to the same payment and commutation restrictions as a pre-1 July 2017 TRIS. The non-retirement phase TRIS does however remain an income stream and must continue to make a minimum pension payment each year in order to meet the pension standards. The pension payments are still subject to the same tax treatment as previously.
A non-retirement phase TRIS will move to being in the retirement phase when a member attains age 65 or reports that they have met a nil cashing restriction condition of release to the Trustee. For those under age 60 this means retiring, and those between age 60 and 65 it means ceasing an employment arrangement.