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There are advantages to delaying TRIS under new TCP rules

pensions article
By Keeli Cambourne
15 March 2023 — 3 minute read

According to SuperCentral, there is a material benefit in delaying the commencement of the pension phase of a superannuation investment until after 30 June 2023, when the new TBC increases from $1.7m to $1.9m.

From 1 July the transfer balance cap will increase from $1.7 million to $1.9 million due to indexation.

This cap is the maximum amount of superannuation which can be transferred from accumulation phase to retirement phase. The reason to transfer super from the accumulation phase to the retirement phase is to obtain the earnings tax exemption. 

However, it’s important to remember that transition to retirement pension is not a retirement phase pension when thinking about how the new transfer balance cap rules will affect superannuation said SuperCentral.

It’s only when a client satisfies an unrestricted release condition which usually are met when the person reaches 65 or becomes retired for superannuation purposes, the transition to retirement pension will then move into retirement phase and a transfer balance account will then be established. 

In an example, SuperCentral talks about Gunhild. Upon starting a transition to retirement pension, a transfer balance account was not created by the ATO. The initial credit to the transfer balance account created for Gunhild will be the balance of the pension account at the time Gunhild satisfies the unrestricted release condition. 

However, if Gunhild is likely to satisfy an unrestricted release condition on or before 30 June 2023, then it will be advantageous for her to commute the transition to retirement pension before she satisfies an unrestricted release condition and then commencing an account-based pension on or after 1 July 2023.

Without commuting the transition to retirement pension, when Gunhild first satisfies an unrestricted release condition, for example when she turns 65, on or before 30 June 2023 she will have a personal transfer balance cap of $1.7 million.

By commuting the transition to retirement pension and commencing a transition to retirement pension on or after 1 July 2023, she will have a transfer balance cap of $1.9 million.

SuperCentral gives an example of a man who commenced an account-based pension with an initial pension balance of $1.6 million on 1 July 2020 (when the transfer balance cap was $1.6 million). As at 30 June 2022, his pension balance has grown to $1.8 million as he has experienced reasonable growth which has materially exceeded the pension payments made from the account since its commencement.

Having $1.8 million in pension phase does not breach the transfer balance cap as the cap applies to the initial pension account balance and subsequent increases in the pension balance due to earnings are not relevant.

In another example, the man in question has not previously commenced a retirement phase pension and his current superannuation balance is $2.1 million.

If he commenced a pension before 1 July 2023, at most the pension could be commenced with $1.7 million (the value of the transfer balance cap for 2022/23 financial year. 

If he commenced an account-based pension on or after 1 July 2023 he would be entitled to a transfer balance cap of $1.9 million rather than $1.7 million. So there would be a material benefit to him in delaying the commencement of his pension until after 30 June 2023.

In accumulation phase investment income (income and realised capital gains) is taxed at 15% (with a one-third discount on long term capital gains which effectively means realised capital gains are taxed at 10%). In contrast, in retirement phase investment earnings are tax free.

As the transfer balance cap is a cap on the amount of super which can transfer from accumulation phase to retirement phase, it has no application to the amount of super you have in retirement phase.

There would also be an advantage in starting a new pension only after 1 July 2023 if the pension balance is less than $1.9 million.

SuperCentral said having a personal transfer balance cap of $1.7 million against $1.9 million has two implications. The first is that the unused transfer balance cap space will be different.

Second is the degree to which the personal transfer balance cap will be increased due to subsequent indexation of the general transfer balance cap.

By commencing the retirement phase pension clients will have a personal transfer balance cap of either $1.7 million or $1.9 million which means they will have the ability to move from accumulation phase to pension phase of $500,000 (if the $1.7 million cap applies) or $700,000 (if the $1.9 million cap applies).

The second implication arises in respect of the extent to which a client will benefit from any future increases in the transfer balance cap. If the pension commences before 1 July 2023, the client will have exhausted about 70 per cent of their personal transfer balance. By way of contrast, if they commenced the pension on or after 1 July 2023, they will have only exhausted about 63 per cent of this personal balance.

Unfortunately, there is no gain in the benefit of the new general transfer balance by commuting a pension and returning to accumulation phase. Once a client starts their first retirement phase pension, the general transfer balance applying at the commencement date will become their personal transfer balance and this balance will remain unchanged except for any proportional increase due to indexation of the general transfer balance.

So, even if the client moves their entire pension capital back to accumulation phase, this movement will not affect their personal transfer balance cap.

There are advantages to delaying TRIS under new TCP rules
pensions article
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