Aaron Dunn, CEO of Smarter SMSF, said there can be technical challenges but also planning opportunities when it comes to transition to retirement income streams (TRIS).
He said TRIS are designed to offer flexibility for members approaching retirement, allowing access to part of their super while still working.
However, the transition from accumulation to retirement phase isn’t just a matter of age; it’s a nuanced process influenced by several factors, including retirement conditions, permanent incapacity, terminal medical conditions, and the pivotal age of 65.
“Part of the issue with TRIS is that it was a product difference, so people needed to sell down in an APRA fund in accumulation or a TRIS product and then move it into a retirement phase product,” he said.
“We ended up with this quandary where the government didn’t want to end up in a situation where APRA funds were disadvantaged when you compared them to self-managed super funds, however, when you look at the requirements it’s a process where the member needs to communicate to the trustee.”
Dunn said one of the key points in the process is the critical role of timing and documentation in the transition process.
“For SMSF practitioners and members, understanding the conditions of release and the necessity for explicit notification to trustees is paramount. This not only ensures compliance but also optimises the tax position of the fund and its members,” he said.
“Documentation is key as it assists in substantiating a member’s transition and the fund’s compliance with superannuation laws. Proper documentation supports strategic decisions, such as commutations and pension commencements, ensuring they are recognised for tax and regulatory purposes.”
Tim Miller, technical and education manager for Smarter SMSF said while there is some control over when a member notifies the trustees of the fund about their intention to transition to the retirement phase, the reasons for that decision are not necessarily known.
“The trustee, either in an SMSF or an APRA fund, don’t know that you’ve retired because you have a terminal illness or some other reason – they’re relying on the member to let them know, compared to just using your date of birth so they know you’ve reached the age of 65 and can retire,” he said.
“It does create these very different scenarios, which then give us very different alternatives for planning when we’ve got members with a transition-to-retirement income stream.”
Miller said TRIS is a big change from a super fund’s point of view, as it changes the tax nature of the income for the fund.
He said strategic planning around TRIS can significantly impact an SMSF’s tax effectiveness and a member’s financial readiness for retirement.
There are potential pitfalls for not adequately preparing for the transition, such as the implications for the transfer balance cap and the potential loss of tax advantages associated with certain asset disposals.
“It may not necessarily have a big impact on the member, but for the whole structure of the fund, it’s pretty significant, so there is that need to document it and to go through the process of firstly making that notice to the trustees and then the trustee acknowledging that which then obviously impacts the timing of when the fund moves into the retirement phase for taxation purposes,” he said.
Dunn said members ultimately need to be proactive in the construct of whatever decision is made because often a pension can be started in a TRIS with an amount above the transfer balance cap.
“If that change is not made by way of commutation back to the transfer balance cap, at 65, there will be an automatic excess transfer balance position,” he said.
Miller added it is important that trustees and members are aware of the consequences if there is insufficient pre-planning for TRIS, and it can have an impact on TBC.
“Alternatively, there can also be consequences if the member wanted to, for instance, sell an asset that potentially had a capital loss attached to it or wanted to realise that loss to be able to carry it forward,” he said.
“If they sell that and then move to retirement and are 100 per cent in retirement, they have lost the benefit of that.”
