Ease into retirement, but still earn income

There is a provision under the superannuation rules to access some of your retirement savings held in your super fund under a “transition to retirement” arrangement. Under this plan, a super fund member can ease into retirement by reducing their working hours without reducing their income.

If you are aged between your relevant preservation age (age 55 if you were born before July 1960) but under 65 years, you are allowed to withdraw some of your super each financial year (no more than 10% of each year’s opening balance) and place it in an account that gives you regular payments, called an ‘income stream’, to supplement your other income – say from part-time work. A transition to retirement income stream allows you access to some superannuation benefits without having to retire or leave your job, and still be able to ‘draw down’ regular payments from your super fund (however these payments are ‘non-commutable’, which means it cannot be withdrawn as a lump sum).

A self-managed superannuation fund (SMSF) can pay a transition to retirement income stream provided its trust deed allows it. Also, once a transition to retirement income stream is commenced, the fund assets that support the income stream attracts no tax on investment income.

The ATO says a transition to retirement income stream must satisfy the following requirements:

  • it must be an ‘account-based’ income stream, which means an account balance must be attributable to the recipient of the income stream
  • the payment of a minimum amount is to be made at least annually – which is 3% of the account balance under a ‘pension drawdown relief’ program for 2012-13, but thereafter is expected to return to 4%
  • total payments made in a financial year must be no more than 10% of the account balance at the start of each year. This is the maximum amount of income stream benefits that can be drawn down each year
  • the income stream is non-commutable
  • it can be transferred only on the death of the member to one of their dependants, or cashed as a lump sum to a dependant or the estate
  • the capital value of the income stream and the income from it cannot be used as security for borrowing.

Work and pension

If you are receiving a transition to retirement income stream and are continuing to work, your fund (SMSFs included) may also be receiving contributions such as superannuation guarantee payments on your behalf. There should be two accounts to make this arrangement work – one for paying the transition to retirement income stream and the other for receiving contributions.

Allowing a lump sum

While no lump sum payments are allowed while receiving a transition to retirement income stream (as it is non-commutable), once a member decides to retire or turns 65, the income stream converts to a normal account-based pension and the member can then take out a lump sum as required.

Pension changes tax take

Once a transition to retirement income stream has begun, the income from that portion of the super fund’s balance generally attracts no tax. With an SMSF, for example, if there are two or more members of the SMSF and only one has taken a pension (that is, the other members are still in accumulation phase), then only the portion of the fund assets attributable to the pension payments escapes paying tax.

Maximum and minimum drawdowns

There is an annual maximum permitted amount of 10% of a fund’s asset balance that can be taken as a transition to retirement income stream, but there is also a minimum, which is a set percentage of the balance at the start of the financial year.

After the global financial crisis (GFC), the government adjusted down the annual minimum amounts fund members were required to draw down, a measure put in place to assist funds in their recovery from capital losses associated with the GFC. The adjusted minimum for under 65s was set at 3%, but will revert to the pre-GFC rate of 4% in 2013-14.