It’s probably one of the most cherished strategies for financial planners as it has the power to boost super savings prior to retirement – and it’s also rather popular with pre-retirees who want to continue working while accessing their super at the same time. It’s called the transition to retirement pension, or TRIP for short. And it’s suitable for pre-retirees who are at least age 55.
So if you fit into this category or are edging closer to it, you should become more acquainted with TRIPs and how they work. Check to see if your super fund offers it; and if you run your own DIY fund, ensure first that your trust deed permits this sort of income stream.
If you already access your super, or you are over age 65, then you don’t need a TRIP. Forget about it. There are cheaper ways to minimise tax and boost your super than buying a TRIP.
So how do they work?
By commencing a TRIP, you don’t have to retire to access your super. You can continue working full-time, part-time or casually. It means that you have the option to go from say full-time to part-time work and supplement your salary or wage with a regular income stream from your super.
Flexibility is one thing, but many financial planners have other benefits in mind when recommending a TRIP and that’s tax. Because of the tax advantages of TRIP income streams – which are tax free if over 60, and concessionally taxed if not – you can use these tax savings to dump as much money as you can into super before throwing in your job for good.
In a nutshell the strategy involves salary sacrificing as much as you can into super (note: there’s a limit and that’s the ‘concessional before-tax contributions cap’ and it’s $50,000 for over age 50 until June 2012) and replacing that income with the pension payments from a TRIP.
So in short, you’re living off the money from your TRIP and you’re shoveling as much of your salary into super. Does this still work if you own a self managed super fund? The biggest issue is ensuring that the pension funds and super funds are segregated. An actuarial certificate may be needed if not.
The other big benefit of this strategy is that you pay zero tax on any investment earnings in the TRIP. Let’s say you earn 7 per cent on your investment portfolio in the TRIP. Well, that 7 per cent is yours, all yours.
Now whether this strategy will be your godsend prior to fully retiring, or will be hopelessly unsuitable, will depend on your salary, marginal tax rate, the size of your super benefit and your age. It will also depend on how much you need to live on. If you have a sizeable mortgage or other debt commitments, then you may find that you can’t salary sacrifice all that much without leaving yourself short.
There are limits on how much income you can withdraw from a TRIP – and it’s between 4 and 10 per cent of your pension account balance every year. So if you have $500,000 stashed away in your TRIP on 1 July, you can withdraw $50,000 for that year. No more.
Now, can you start a TRIP, and then withdraw the lot as a lump sum payment? The answer is no. Not unless you turn 65, or officially retire.
So, in summary:
– Over Age 60 – Pension income from a TRIP are tax free; investment earnings in a TRIP are tax free
– Under Age 60 – Pension income from a TRIP is taxed. However there’s a tax-free component to utilise; plus, anyone between age 50 and 60 receives a 15 per cent pension offset on the taxable component of the pension payments from the TRIP. Investment earnings in a TRIP are tax free.
This is for general information purposes only and does not constitute investment advice. Please see a financial adviser before making any investment decisions.