In Superannuation, a member can commence an income stream or a pension from their member’s entitlement from the time they become eligible. It is important to note that the rules on withdrawing benefits from Superannuation are strict and penalties apply if you take money from your fund when you have not met eligibility requirements. Account based pensions are able to be established once members have met a condition of release.
An Account Based Pension (ABP) is as its name suggests; it is an entitlement to income derived from the account of the member. There are two different types of account based pensions. The first is an ABP with no cashing restrictions and the second is a Transition to Retirement Income Stream (TRIS) (sometimes referred to as a TRAP or TRIP) which has a maximum amount that can be withdrawn each year.
ABP’s have no maximum withdrawal limits and TRIS’s have a maximum withdrawal limit of 10% of the members balance. The money and investments backing these pensions will be deemed to be tax free if the requirements of the pension are met each year.
Typically but not always, an ABP will be commenced once the person in question has fully retired and never intends to go back to work. This gives the member total flexibility in crafting an income stream that suits their needs. Pensioners on ABP’s have no rules other than the need to take a certain amount each year as a minimum requirement. A pensioner on an ABP does not need to take regular monthly amounts from their entitlement but must meet annual payment requirements to maintain tax free status.
In most cases, people who commence a TRIS will have reached preservation age but are continuing to work or contribute to their SMSF. The advantage of commencing a TRIS is that members can sacrifice their salary and wages to Superannuation reducing their taxable income while withdrawing the same or similar amounts from their pension account to keep the same level of personal income. The higher the personal taxation bracket of the member the greater the tax advantage this strategy provides. Pensions paid from Superannuation will be added to the personal income of the member up until the member reaches age 60, and a rebate is given for tax already paid. Contributions to the SMSF are usually 15% depending on your personal income.