Transition to Retirement Pensions (TRIPs)
A transition-to-retirement pension (TRIP) enables Australians who have reached their preservation age, which is dependent on their date of birth, but ranges between 55 and 60, to access their super fund in the form of a pension without retiring or meeting any other condition of release.
TRIP's were originally introduced in July 2005 to help individuals to keep working while drawing down some of your super benefits - allowing them to gradually move into retirement by reducing hours or taking on alternative employment - whether part-time or full-time. TRIPS were used for this purpose, but in the past were used as a part of a strategy to both increase super and minimise tax - leading to some legislative changes in 2017 that made TRIPS less attractive in some situations.
Six Important Things to Appreciate about TRIPs
1. You must have reached preservation age
As mentioned above, your preservation age depends on your date of birth, but anyone born on or after July 1, 1964 will now need to reach 60 before qualifying for a TRIP.
2. When being paid a TRIP your fund earnings do not pay tax;
Once a TRIP has commenced, the super fund assets supporting the income stream generally pay no tax for members aged 60 or more - members below age 60 have been subject to normal super fund taxation since July 1, 2017.
3. You must withdraw between 4% and 10% of your super fund balance each year from your TRIP
If you are under age 65 and still working, you can withdraw between 4% and 10% of your pension account balance each financial year - on a monthly, quarterly or annual basis depending on the individual super fund/ product. Our view is that 10% is far too high, as it could significantly affect your super balance on actual retirement, unless your circumstances are unusual, the TRIP is not applying to all your super funds or perhaps you are using it as a mechanism to moves funds into a spouse or partners account.
4. You cannot withdraw a lump sum
In essence, a TRIP is an account-based pension from which lump sum payments can only be made in very limited circumstances. In other words the pension is "non-commutable", although once you meet a condition of access (eg. decide to retire or turn 65), the income stream converts to a normal account-based pension and you can then take out a lump sum as required.
5. TRIPs and Salary Sacrificing
A TRIP strategy popular with many planners involves salary-sacrificing up to your annual concessional contributions cap and at the same time receiving pension income from a TRIP. This approach has a number of advantages, including 1) the salary sacrificing reduces an individual's taxable income while the contributions are taxed at a rate of 15%, typically well below the individual's marginal rate, while 2) no income tax is paid on TRIP income post age 60, and at a preferential rate below age 60. So, pay less tax and accelerate your super contributions all at the same time!
Calculations illustrating this approach in more detail are available at Moneysmart.
6. Not all Super Funds offer TRIPs
Not all superannuation funds offer TRIP's and therefore you will need to check with your fund in that regard. Also, if you are running a self managed superannuation fund (SMSF) you will need to check with your advisor to ensure that the trust deed allows for these types of income streams.
In summary, we believe TRIPS are an underutilised strategy - where the circumstances allow, and you are supportive, we think retirement should be a gradual process which you can accelerate or decelerate at your choice - and TRIPs are a good fit in many circumstances.