SMSF Technical Education & Strategies

The Transition to Retirement Pension and Preservation Components

Your member account in your SMSF is made up of two tax components. A taxable component, and a tax free component. When you start to draw down a Transition to Retirement (TTR) pension, the taxable vs tax free portion of the fund stays the same regardless of whether or not your account balance goes up or down.

For example, if your account has a 70% / 30% split between the taxable and tax free components at the start of the pension, then this will continue while the pension continues. This is fairly well known.
 
Now, your member account also has what is known as “preservation components”.
 
These are preserved, restricted non preserved, and unrestricted non preserved (UNP) components. The UNP component is the one that you can fully access, and hence is generally thought of as the most valuable preservation component and one that you don’t want to reduce unnecessarily.
 
Here’s the thing though. Unlike the tax components above, when you commence a TTR pension (and hence the condition of release does not have a nil cashing restriction) the preservation components are NOT drawn down proportionally. They are drawn down in a particular order.

Reg 6.22A SISR tells us:

“6.22A(1) [Cashing restriction in condition of release] This regulation applies to a trustee of a
regulated superannuation fund if:
 
(a) a member of the fund has satisfied a condition of release; and
(b) there is a cashing restriction (other than a ‘nil’ restriction) in respect of that condition.
 
6.22A(2) [Order of priority] In cashing benefits in accordance with the restriction, the trustee
must give priority to benefits in the following order:
 
(a) first – to unrestricted non-preserved benefits;
(b) second – to restricted non-preserved benefits;
(c) third – to preserved benefits.”
 
Therefore, if you commence one single TTR pension with both UNP and preserved benefits combined, then the value of your UNP benefits will be reduced first – there is no proportional draw down as there is with the tax components.
 
This may mean that after just a few years of pension payments, your UNP balance may be substantially reduced, which is not what you will necessarily want.

The bottom line

If you are looking at starting a TTR pension, check your preservation components.
 
If you have both preserved and UNP components, then consider running two pensions - one with just the UNP component, and one with just the preserved component.
 
In actual fact, the UNP pension is not a TTR pension at all. It will be a regular account based pension as the benefits are unrestricted. The other pension will still be a TTR.
 
The key benefit to this strategy is the value of the UNP benefits in the account based pension will not be drawn down quickly, but will instead just change in line with the account balance of that pension. This is a superior outcome to just combining both the preserved and UNP components in one TTR pension.