Information for advisers only.
The superannuation environment is well suited for structuring income streams. Although there are many different types, the vast amount of income streams are sourced from account based pensions and insurance companies (annuities). The tax treatment is the same for both and they are taxed on a concessional basis internally and on payment.
Since 1 July 2017, the Transfer Balance Cap both restricts the amount that can be placed into retirement phase account based pensions, as well as the concessional tax treatment of defined benefit pensions. Amounts transferred into retirement phase accounts that exceed an individual’s personal Transfer Balance Cap (currently the general Transfer Balance Cap is $1.9 million for those who have not held a retirement phase account based pension between 1 July 2017 and 30 June 2023) must be either rolled back to accumulation phase or commuted as a lump sum. Please refer to the following for more information about the Transfer Balance Cap:
Account based pensions (ABPs) make up the majority of pension products on issue. Superannuation members can commence these pensions once they’ve met a condition of release. This is usually retirement, however other conditions of release include:
transition to retirement
death where the pension is paid to the surviving spouse, a child under the age of 18, a financial dependent or a person with whom the deceased had an interdependent relationship.
The table in Schedule 7 of the Superannuation Industry (Supervision) Regulations 1994 lists the minimum percentage of the account balance (depending on age) that must be taken as a pension each financial year. For the 2019/20, 2020/21, 2021/22 and 2022/23 financial years these percentages are halved.
The account balance is measured on the date of commencement and on 1 July of each year thereafter. For account based pensions that commenced on or after 1 June in a financial year, no pension payment needs to be made for that financial year.
Where a pension commences mid-year, a prorated minimum pension must be taken. Similarly, where a pension is fully commuted during the year, the prorated minimum pension payment must be made prior to the full commutation.
There is no limit on the maximum amount of pension payments that can be taken each year except in the case of a transition to retirement pension, which is limited to a maximum of 10%.
TTR pensions are account based pensions that can be commenced by individuals who have reached preservation age, but are yet to retire or meet another condition of release. A TTR pension can only be commuted and rolled back to the accumulation phase of superannuation. It cannot be commuted in the form of a lump sum cash payment (except where an unrestricted non preserved component exists, and subject to the rules of the provider) until a condition of release with a nil cashing restriction such as retirement or turning age 65, is met.
TTR pensions have been available since 2005 and were originally intended to supplement a person’s income as they transitioned to retirement, switching from full time to part time employment. TTR pensions can also be commenced to replace income salary sacrificed into superannuation by eligible individuals who continue a full time employment arrangement. This strategy is most tax effective for persons aged 60 and above as the pension payments received are tax free.
While the same prorating of minimum pensions applies to TTR pensions, there’s no requirement to pro rata the maximum when a pension is commenced midway through the financial year.
Since 1 July 2017, the earnings on the account balance of TTR pensions are no longer exempt from tax, as they’re not considered to be a retirement phase pension. This means the account balance is subject to the same tax treatment as accumulation phase account balances. Plus, as TTR pensions are not retirement phase pensions, they’re not subject to the Transfer Balance Cap.
No new legacy complying lifetime, fixed term or term account based pensions (TAP) can be commenced by superannuation funds except in limited circumstances, which involve using funds from the commutation of a previous fixed term pension to commence the new one. An exception to this rule is employer defined benefit schemes which have specific grandfathering provisions.
Prior to 1 July 2007, superannuation funds provided complying lifetime pensions, fixed term/life expectancy pensions or TAPs (also known as market linked income streams) enabling members to access the higher pension reasonable benefit limits (RBLs). These pensions also met the Social Security compliance requirements enabling the pensions to be 100% exempt from the asset test if issued before 20 September 2004 or 50% if issued before 20 September 2007.
With the removal of RBLs on 1 July 2007, and asset test exemption of pensions from 20 September 2007, the need for these products disappeared.
Individuals with legacy products, subject to certain conditions being met, may be able to commute the pension and roll these monies into a new fixed annuity (for 100% exempt legacy products) or fixed annuity/TAP (for 50% asset test exempt legacy products) that met Social Security asset test exemption requirements. Whilst annuity products are still readily available, TAPs are not, although it’s possible to commence a new TAP within a self-managed superannuation fund. The social security requirements for these new income streams to retain the asset test exemption of the commuted products are covered in the Social Security Guide.
For annuity products sourced from superannuation monies, there are minimum and maximum term requirements for the annuity to retain the concessional tax treatment that are afforded to superannuation products. The minimum term is the life expectancy of the annuitant (if there is a reversionary with a longer life expectancy that may be selected instead). The maximum term (depending on whether the annuitant’s or reversionary’s age has been used for the minimum term) is the greater of:
The number of years until the annuitant/reversionary reaches age 100; or
The life expectancy of a person 5 years younger than the annuitant/ reversionary.
There are similar rules on the minimum and maximum term requirements for TAPs.
The concessional tax treatment is also extended to certain innovative income streams that satisfy Regulations 1.06A and 1.06B which apply to new lifetime income streams and which are not able to start paying benefits until the individual has satisfied a full condition of release or deferred. Once payments start, they must be paid at least annually for the remainder of the individual’s lifetime (as well as any reversionary beneficiary) and the commutations are limited to satisfying a capital access schedule.
Payments from lifetime and fixed term pensions are determined by the product provider by taking into account the earnings rate offered. In addition, the payment must also satisfy either the minimum pension payment percentages applied to account based pensions, or if the requirements relating to the term of the pension contained in Regulation 1.06 (9A) (b) (ii) (A) are met, the abovementioned minimum pension payment for the first year, with subsequent years varying in line with an approved indexation arrangement.
For fixed term pensions, where the first of the minimum pension payment options is selected, it’s possible to structure the payment schedule so that all, or part of the purchase price is returned as a residual capital value at maturity.
For TAPs, the payment requirements are contained in Schedule 6 of the Superannuation Industry (Supervision) Regulations 1994.
The annual payment is calculated by dividing the account balance as at 1 July each year (or commencement) by the payment factor for the term remaining. Depending on the pension provider, this annual payment can then be varied by plus or minus 10 per cent. For the 2019/20, 2020/21, 2021/22 and 2022/23 financial years, the annual payment can be varied down to 45% and up to 110%.
The new innovative income streams noted above do not have set minimum pension payment requirements.
Download "The transfer balance cap".
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