Converting a 'transition to retirement' pension to an account-based pension

26/04/2017

Don't make assumptions about your "transition to retirement" pension.

You are currently on a “transition to retirement” pension and think that when you satisfy a condition of release (ie you’re entitled to take capital from the fund), this pension will automatically convert to an “account based” pension because the latter can only arise once a condition of release has been met. Is this correct? Well, the answer depends on how your pension documents are drafted.

It is important to be aware of whether or not your pension documents are drafted on the basis that once a condition of release has been met, the current “transition to retirement” pension will switch to “account based” pension. Do not assume that once you have satisfied a condition of release, this conversion automatically kicks in. Otherwise you may be unaware that you have been continuing a “transition to retirement” pension when you no longer qualify for it.

This is also especially important given the recent changes implemented by the government and outlined in the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016. These changes relate to superannuation and taxation and will come into effect on and from 1 July 2017.

One significant change affects “transition to retirement” pensions. Currently, fund earnings for this type of pension enjoy a tax exemption but this exemption will be removed come 1 July. After 1 July, fund earnings will be subject to 15% tax whilst capital gains on assets owned for 12 months or more will be subject to a 10% tax.

Therefore, it is very important that if you are currently on a “transition to retirement” pension and know that you will be meeting a condition of release on or around 1 July 2017, you carefully review your pension documents to ascertain whether these documents allow for an automatic conversion to an “account based” pension.

Even if your Trust Deed allows for an automatic conversion, it is recommended, for audit purposes, that documentation still be prepared to note the switch from a “transition to retirement” pension to an “account based” pension.

We are able to assist in relation to this by reviewing your trust deed and advising on the necessary documentation to note the conversion once a condition of release has been met.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.