Transitioning to retirement pension in an SMSF

The transition to retirement income pension is quite straight forward, however whether there are clear benefits depends on an individual’s personal circumstances.

When an individual starts the transition to retirement income pension (TRIP) once they reach preservation age and are still working, they receive an income stream from their SMSF.

Their existing account balance in their SMSF simply becomes a pension account, and any future contributions will go to a new accumulation fund in the same SMSF.

The minimum income an individual is required to receive each year is 4 per cent of the balance of their pension account. The maximum income stream they can receive is 10 per cent of the balance of their pension account.

When an individual starts their TRIP, they must instruct their employer to reduce the amount of salary received, and instead salary sacrifice this amount into their SMSF. The maximum salary sacrifice that can be made is $35,000 a year. This includes any employer contributions, such as the compulsory 9.5 per cent employer contribution.

The main benefit of a TRIP is to do with reducing tax. Reducing take home salary means reducing assessable income (which is taxed at an individual’s marginal tax rate). Converting to a TRIP and changing your SMSF to a pension account also means tax on any income your pension account earns, including CGT, will be reduced to zero.

In a lot of cases, implementing a TRIP can mean a significantly higher retirement balance, so it is something everyone should investigate.

Categorised in: Firm journal

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