Transition to Retirement Pension: Reaching Preservation Age and Still Working

Reaching your preservation age is a significant milestone in Australian superannuation, but it does not necessarily mean retirement or stopping work.

The preservation age varies depending on your birth date, ranging from 55 to 60 years. For many Australians, it is 60, but others have a different preservation age based on when they were born. You can check your exact preservation age using the ATO’s preservation age calculator.

Transition to Retirement Income Stream (TRIS)

If you have reached preservation age but continue working, you may be eligible to commence a Transition to Retirement (TTR) Pension, also known as a Transition to Retirement Income Stream (TRIS). This pension allows you to access a portion of your super as income while still employed. It offers an opportunity to reduce working hours or supplement earnings with pension payments.

However, TTR pensions are generally not considered to be in the “retirement phase” unless you have fully retired or reach age 65. This distinction is important because income earned within the SMSF supporting a TRIS has been subject to tax at 15% since 1 July 2017.

Unlike full retirement phase pensions, TTR pensions are not automatically tax-free even if you are aged 60 or older. The tax-free treatment applies when the income stream enters the retirement phase following retirement or reaching age 65 under Superannuation law.

Trust Income Schedule (TIS)

If your SMSF is 100% in the pension phase, which typically means all your assets support retirement phase income streams, you generally do not need to submit a Trust Income Schedule (TIS) with your tax return. This is because the fund’s income is treated as exempt current pension income (ECPI), which is not subject to tax.

However, should your SMSF hold a mix of pension phase and accumulation phase assets (mixed phase), a TIS becomes necessary to correctly allocate income according to respective tax treatments. Trustees should consult the latest ATO guidelines and SMSF return instructions to determine whether submitting a TIS applies in their circumstances.

Minimum Pension Withdrawals

Superannuation law requires trustees to pay minimum amounts each financial year for account-based pensions (including TTR pensions). Minimum withdrawal rates are age-based, starting at 4% for members under 65 and increasing with age as specified by ATO tables.

Failing to meet these minimum withdrawal requirements can increase the tax burden on your SMSF. Should the fund not pay the minimum amount, the ATO may treat the pension as ceased for tax purposes. Consequently, the income supporting the pension loses its tax-exempt ECPI status and may be taxed at 15%. Trustees may be able to apply for relief in some limited cases involving honest or minor shortfalls, but it remains a significant compliance risk.

Trustee Responsibilities

Trustees must understand the nuances of TRIS rules, distinguish pension phases, and ensure compliance with reporting and withdrawal requirements. Maintaining proper records and regularly reviewing pension payments is crucial.

Engaging qualified financial advisers or SMSF specialists helps trustees navigate tax implications, regulatory requirements, and optimise retirement income planning while remaining compliant.

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(GENERAL INFORMATION ONLY)

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DISCLAIMER: This article is provided for general information and educational purposes only. It does not constitute financial, legal, tax, investment, or other professional advice and has been prepared without taking into account your personal objectives, financial situation, or needs. This article may include perspectives from industry contributors. Contributor participation does not imply endorsement, recommendation, or preferred referral status. While reasonable care has been taken in preparing this content, no representation or warranty is made as to its accuracy, completeness, or currency. SMSF Intelligence does not accept liability for any loss or damage arising from reliance on this information or any linked materials. SMSF Intelligence does not provide financial, legal, or tax advice. Before making any decisions, you should consider the appropriateness of the information in light of your circumstances and seek advice from a suitably qualified and licensed professional.