A Transition to Retirement Pension in an income stream that you can commence from your SMSF if you have reached preservation age (currently age 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 work hours and still maintain your standard of living. Transition to Retirement allows you to withdraw some or all of your SMSF balance into a retirement income stream.
How does a Transition to Retirement work?
You will have 2 accounts within your SMSF. Once you reach preservation age, you can elect to have a Transition to Retirement income from your SMSF.
If you are 55 then you have to take as an income of between 4% – 10% (3% minimum for 2013 year) 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.
How do you activate a Transition to Retirement?
Trustees manage the SMSF and are responsible to start the Transition to Retirement. When you start the Transition to Retirement, minute this decision. Here is a template of these minutes
Then send a copy of the minutes to Superannuation Warehouse via the email address.
Tax consequences in the SMSF
From the date the Transition to Retirement start, the capital portion and income earned on this is considered to be pension and therefore tax free. This is a great incentive in itself to start a Transition to Retirement. As explained above, 2 accounts are kept for the beneficiary in Transition to Retirement. If there is also an accumulation account in the SMSF you will need to segregate the pension assets in the SMSF or get an annual actuarial certificate if all the SMSF assets remain pooled together. This is to ensure you receive the tax exemption status.
Tax on the Transition to Retirement income received from the SMSF
If you are over age 60, the income you receive in the form of pension payments from your SMSF are tax free in your hands. If you are between age 55 and under age 60, this Transition to Retirement income should be included in your personal taxable income.
Payments can not be lump sums
The pension payments that you receive do not have to follow any set pattern (e.g. monthly or quarterly etc) even though most do. You just need to make sure that at least the minimum amounts of Transition to Retirement payments have been made over the year.
Minimum Drawdown Amount
Depending on your age, there is a minimum that should be withdrawn each year from the Transition to Retirement balance. At the start of the year, calculate the market value of the Transition to Retirement. The minimum draw down is dependant on your age. See the preservation age table for the percentage.
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 have been temporarily halved for the 2009 – 2011 financial years. This is known as minimum pension drawdown relief.
We will register your SMSF for PAYG withholding tax.
For more information on the Transition to Retirement income streams, click here to read more on the ATO website.