When transition to retirement income streams first burst on to the scene, they spawned countless great superannuation strategies, particularly in SMSFs. These days they are largely invisible. So are they ever valuable?
TRISs were particularly popular between 2007 and 2017 when they still gave rise to a tax exemption in the fund (exempt current pension income or ECPI).
By starting a TRIS immediately on reaching preservation age, anyone - even those in full time work - could effectively swap some of their normal salary for a tax free or concessionally taxed super pension, use the spare cash to increase their salary sacrifice contributions and receive a tax exemption on some or all of the fund’s investment income at the same time. Even those with no opportunity to increase their salary sacrifice contributions generally found the tax break in their super fund alone was enough to make the exercise worthwhile.
But of course that disappeared in 2017 when ECPI was narrowed to just “retirement phase” pensions.
So does a TRIS have any relevance today?
At Heffron we are increasingly fielding calls from accountants and advisers with cash strapped clients who haven’t yet retired but are in desperate need of some additional income “now”. Many initially approach this with a view to demonstrating financial hardship – only to discover that there’s way more to this definition than just needing some extra income to meet normal living costs (see a great blog from my colleague Annie Dawson on exactly what's required for financial hardship here. It seems we have all forgotten that the humble TRIS is a perfect solution for anyone in this position who also happens to be over their preservation age (these days, 59 or 60 in most cases).
Even if they intend to continue in full time work for years to come, they can still convert some or all of their super to a TRIS. Certainly, it doesn’t provide ECPI but it does provide income and potentially quite a lot. For example, even a TRIS that starts in December 2023 could pay out 10% of the member’s balance during 2023/24 – there is no need to pro-rate the maximum payment just because the pension starts mid year.
And remember a TRIS is not subject to the transfer balance cap so there’s no upper limit. A member who is 61 today with $3m in super could commence a TRIS with the full amount and withdraw up to $300,000 during 2023/24, entirely tax free. Someone looking to pay down their mortgage (or help their children do so) as interest rates skyrocket could find this invaluable.
There are certainly traps to watch.
For example, the transfer balance cap will apply as soon as they retire or turn 65. So it will be important to make sure the pension is reduced down to $1.9m beforehand. But in the meantime, it’s a potential source of additional funds for as long as necessary. Once those extra funds aren’t needed, the TRIS can simply be switched off.
Couples looking to even up their super balances could also make valuable use of a TRIS. This has always been handy for transfer balance caps but will potentially become even more relevant if / when the new tax on those with more than $3m in super is introduced.
Consider Kate ($2.5m in super) and Andy ($1m). They are both 60 but neither have retired. A TRIS for Kate would allow her to withdraw up to $250,000 this year and return the same amount to the fund as a contribution for Andy. Or perhaps they would prefer to just withdraw $110,000 per year from Kate’s TRIS and contribute for Andy each year.
The aim is to ensure their super is shared more evenly so they make better use of their $1.9m transfer balance caps by the time they are both ready to start retirement phase pensions. While they could wait until retirement (or reaching 65) to get started on this evening up process, who knows what will happen in the meantime? If their respective balances skyrocket, it might not be possible to move as much to Andy’s super as they’d like.
A TRIS for Andy could also make use of another TRIS benefit – the fact that it allows members to quarantine their existing super from new contributions. If Andy’s $1m balance is 100% taxable component, there is real value in ensuring the new non-concessional contributions are kept quite separate from his existing account. It will mean that in future, Andy can source any large amounts he wants to take out of super from the “100% taxable” account and leave his “largely tax free” super balance (that comes from the new non-concessional contributions) intact. Taking this step now will help both Kate and Andy minimise the tax paid by their adult children once they’ve both died.
Of course, converting his existing super to a pension means Andy has to take some of his own money out of the fund each year as well – but only 4% of the balance. Overall, if he is likely to make large non-concessional contributions in the coming years it’s likely to be a better result than allowing all his super to mix together.
All in all, it’s entirely possible that once TRISs lost their most important benefit (ECPI), we collectively forgot about them. In fact, they still have a valuable part to play under the right circumstances.
We’ll talk about these and a few other important ways to access super before retirement in our session “Accessing super before retirement” at our forthcoming Super Intensive Day.