Trustees and advisers should consider a number of factors, including the impact on Centrelink benefits, if planning to change a Transition to Retirement Income Stream to an Account Based Pension.
Transition to Retirement Income Streams (TRIS)
A TRIS is a superannuation income stream that may be commenced once a member reaches their preservation age, currently 57 years of age.
A TRIS is basically an account based pension with 3 major restrictions:
- the annual payments cannot be greater than 10% of the assets supporting the TRIS;
- payment of a lump sum is not permitted from preserved funds; and
- an order of cashing of benefits applies, with unrestricted non-preserved benefits drawn first, with preserved benefits paid last.
Account Based Pension
Account based pensions may only be commenced with the unrestricted non-preserved portion of a member’s balance in a fund.
Once a member has met one of the conditions of release which has a ‘nil’ cashing restriction, their benefits in superannuation at that time become unrestricted non-preserved.
The most common of those conditions of release is the retirement condition of release.
Lifting the lid off a TRIS
So what happens when a TRIS has been commenced by a member of an SMSF, and now they have met a ‘nil’ cashing restriction condition of release?
The ATO has directed that, from 1 July 2017, the industry practice that a TRIS would automatically convert to an account based pension once the individual met a condition of release, is no longer applicable.
Instead, as we now have the scenario of members with interests in Accumulation Phase and/or Retirement Phase, a TRIS will remain a TRIS but will convert from Accumulation Phase to Retirement Phase once that condition of release is met and, if under age 65, the member elects for the conversion to proceed.
Reset or Convert the TRIS?
When determining if a TRIS should be commuted to commence an account based pension upon a condition of release being met, or alternatively, if an election to convert the TRIS to Retirement Phase should be made, there are a number of factors to consider.
In relation to a TRIS being reset to an account based pension, the following considerations apply:
- any Centrelink income test grandfathering will cease;
- a pro-rata pension payment to date of commutation will need to be made prior to commutation;
- new documentation to commence an account based pension will be required;
- a pro-rata payment will be required for the account based pension for the remainder of the year;
- a Transfer Balance Account Report (TBAR report) of the commencement of the account based pension will be required; and
- the account based pension will be in Retirement Phase, meaning the income on assets supporting the pension will effectively be tax-free.
Alternatively, when a TRIS is converted from Accumulation Phase to Retirement Phase, the TRIS does not stop, meaning:
- the Centrelink income test grandfathering, if applicable, will not cease;
- no pro-rata minimum payment is necessary as a result of the conversion;
- whilst the TRIS will automatically convert to Retirement Phase if the member reaches age 65, documentation enabling the member to elect to convert is required in other instances;
- a TBAR report of the conversion of the TRIS will be required (including if automatically converted at age 65); and
- as the TRIS will be in Retirement Phase, the income on assets supporting the income stream will effectively be tax-free.
Centrelink assessment (for income test purposes) of superannuation income streams commenced after 1 January 2015 is based on a deemed rate of return applied by Centrelink to the value of the pension, when assessing the entitlement of an individual to government benefits.
Income streams commenced before 1 January 2015 are ‘grandfathered’ – i.e. the income test deeming does not apply.
Whilst the impact of the differing assessment process will vary across individuals, one aspect is clear – recipients of income streams commenced after 31 December 2014 will have no choice as to the options available.
One important consideration when determining what to do with a TRIS once a nil cashing restriction condition of release has been met, therefore, is that the resetting of the pension will result in the new account based pension being assessed under the deeming provisions mentioned above.
As the restrictions for a TRIS are removed (the ‘lid’ has been lifted) when the recipient meets a condition of release with a nil cashing restriction, the TRIS in Retirement Phase is effectively a mirror image of an account based pension.
There is one particular difference however which has been recognised as an ‘unintended consequence’ of the legislation introduced from 1 July 2017, which relates to the automatic reversion of the TRIS following the death of the initial recipient.
The current legislation permits the reversion only if the beneficiary has met their own condition of release with a nil cashing restriction. Legislation has been introduced to parliament to remove that restriction (effective 1 July 2017), so that the same conditions as for an account based pension will apply.
In the meantime, until the legislation is passed, consideration should be given to those instances where the proposed beneficiary may not have met their own condition of release with a nil cashing restriction.
Topdocs Pension Documentation
Topdocs provides a range of income stream documentation as part of our SMSF services, 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.
This article, “Should a TRIS be converted to an Account Based Pension when a condition of release has been met?”, was written by Michael Harkin, National Manager for Training and Advice, Topdocs.
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