Tax with Max: TTRs vs account-based pensions

The differences between Transition to Retirement and account-based pensions

Currently my husband and I have an SMSF that is in accumulation mode. We have no children and my husband is 59 and works full-time, and I will be 55 in October 2014. We were advised to start a Transition To Retirement pension but do not wish to reduce the working hours or need a pension from the SMSF, so did not act on it. We also do not receive any Centrelink benefits.

If my husband starts a TTR pension, and starts an account-based pension now before January 1, 2015 would that pension escape the new deeming rules for qualification for certain benefits including the Commonwealth Seniors Health Card? If yes, can I follow onto a TTR pension and an account-based pension on turning age 55? Can we then re-contribute the account-based pension back into the SMSF as an after-tax contribution?

Answer: A TTR pension and an account-based pension are two different pensions. To commence an account-based pension a person must have met a condition of release. The most common conditions of release are turning 65, if aged between 59 and 65 having ceased employment with an employer, or if aged between 54 and 65 having ceased full-time employment. To cease full-time employment means not intending to work more than 10 hours a week.

To commence a TTR pension a person must be at least 55 or have attained preservation age, continue to work part-time, and the pension must be a non-commutable pension. A non-commutable pension is a pension that cannot be converted into a lump sum. The other difference between a TTR pension and an account-based pension is that, as well as having a minimum pension payment rate, there is a maximum pension payment rate of 10% that applies.

When TTR pensions became law there was no definition placed on “working part-time”. This has meant a person can continue to work full-time, and as long as they meet the other three conditions they can be entitled to receive a TTR pension. As a result of this your husband could have started a TTR pension and continued to work full-time.

Commencing a TTR pension is a common strategy for someone who has turned 60. This is because they can receive the TTR pension tax-free and, because a superannuation account paying a pension pays no income tax, by taking the minimum pension payable their superannuation account can increase despite the pension being paid.

A part of this strategy of commencing a TTR pension is for the member receiving it, because they are receiving tax-free pension income, to maximise their salary sacrificed as extra superannuation contributions. This also results in a person’s superannuation increasing despite a TTR pension being paid.

Unfortunately if your husband commences a TTR pension now this would not mean the new rules applying from January 1, 2015 can be avoided. For the deeming rates to not apply to an account-based pension a person must be in receipt of income support of some type from Centrelink, or be currently entitled to a Commonwealth Seniors Health Card, and have commenced an account-based pension by December 31, 2014.

This means there will be no advantage if either of you commencing a TTR pension before the deadline if you had hoped to avoid the new deeming rules. Given the other advantages of starting a TTR pension, and also considering that your husband will soon be turning 60, you should seek professional advice about the advantages and disadvantages of this type of pension.

Understanding how tax-free amounts can rise in pension phase

In a recent answer you said: “A new account-based pension would then have been commenced with a new tax-free percentage being calculated at that point. The same process would have to be applied for each following lump sum payout and re-contribution made. The actual value of your tax-free superannuation will depend on what the value of your account-based pension account was just prior to the first $150,000 being deducted, and could be greater than $650,000”.

If $650,000 has been put in as non concessional contributions, how can the tax free amount be greater than $650,000. If withdrawals have been made, some of which will include a non-concessional proportion, then the tax-free balance must be under $650,000.

Answer: I can understand why you would doubt how a tax-free amount can increase when a pension is being paid. This can happen because the tax-free component is expressed as a percentage once a pension is commenced, and when a super fund has an earning rate that is greater than the pension paid.

In the example in the original article, the pension started off with $1 million with 20% being tax-free. This pension was paid for approximately 10 years. If over that 10-year period the value of the member’s account increases from $1 million to $1.2 million, because the tax-free percentage of 20% remains the same, the value of the tax-free superannuation would have grown to $240,000.

In the example, a further $450,000 of non-concessional contributions were made. This would have resulted in, given that the original tax-free superannuation had grown to $240,000, the tax-free superannuation being worth $690,000.

Holding superannuation and qualifying for the age pension

My mother is turning 67 in a few days. She owns her house that is valued at $900,000 and has $125,000 in super. My father passed away last year, so she is now on her own. If she withdraws part or all of her super, will her Centrelink benefits be affected? Will her Centrelink benefits be affected if she does not withdraw any super?

Answer: As your mother owns her own home the amount of age pension that she receives will be affected by the assets test, which applies to all of her other assets but not including her home, and the income test. If your mother has other assets, such as bank accounts and the value of her furniture and fittings, which in total are not worth more than $75,000, she will be entitled to receive the full age pension.

As your mother is over 65 the value of her pension is counted in the assets test. Whether she leaves her superannuation in place or takes it as a lump sum will not change the fact that it is counted under the assets test. If the superannuation was taken as a lump sum there could be a detrimental effect to the amount of age pension she is entitled to.

Under the current income test, which will cease on January 1, 2015, the full value of an account-based pension is decreased by a purchase cost. As your mother is under 75 years of age the minimum pension she must take is 5%, and after taking account of the purchase price, very little of her account-based pension will be included in the income test.

Because the rules relating to how account-based pensions will be treated by Centrelink change on January 1, 2015 you should seek professional advice before deciding to cease her pension and pay out the superannuation as a lump sum.

Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au