Australians are increasingly trending towards reducing the number of days worked in the lead-up to retirement and a transition to retirement pension is specifically designed to help you do just that.
Imagine being able to ease into retirement by reducing your work hours, all while minimising tax and growing your super balance. This might sound too good to be true, but it’s exactly what a Transition to Retirement (TTR) pension offers.
This article explores how a transition to retirement pension works, including when you can start one, how tax is applied, the pros and cons, and why almost every Australian should start a TTR pension as they approach retirement.
If you’d rather watch than read, this video also covers the topic:
What is a Transition to Retirement Pension?
A Transition to Retirement (TTR) pension is a retirement income stream that you can start with all or some of your superannuation accumulation account balance.
To be eligible to start a TTR pension, you need to have at least attained age 60. However, there is no need for you to be retired or have quit your job. You can start a TTR pension even if you are still working.
There are accessibility restrictions on a TTR pension. Specifically, you are limited to accessing between 4% and 10% of your account balance each financial year, recalculated on the 1st of July each year.
This differs from an ordinary account based pension, which has no upper income threshold and allows you to make lump sum commutations.
TTR Pension vs Account-Based Pension
The difference between a TTR pension and an ordinary account based pension is that TTR pensions limit the maximum income that can be drawn each year to 10% of the account balance and that investment earnings within a TTR pension account aren’t received tax free.
Also, the requirement to start a TTR pension is only that you need to have reached age 60, whereas there are further requirements to start an account based pension, until age 65.
Everything else remains the same.
So, what are the benefits of a transition to retirement pension?
Benefits of a Transition to Retirement Pension
The benefits of commencing a transition to retirement pension can include:
- Reduce working hours – you can reduce your working hours in the lead-up to retirement and use your TTR pension income to supplement your work-related earnings.
- Ease into retirement – accessing your super and reducing work days without fully retiring gives you the opportunity to see if you’re ready to retire, or not.
- Pay off debt – you can start a TTR pension and use the income to pay off debt faster, which could help ensure you are debt free upon eventual retirement.
- Reduce tax – making salary sacrifice or personal concessional contributions to super and then replacing it with tax free income from a TTR pension can help minimise your overall tax.
- Recontribution strategy – receiving tax-free TTR pension payments and contributing the equivalent amount back into an accumulation account as a non-concessional contribution can convert taxable elements into tax-free elements, which may reduce potential death taxes, without reducing your super balance.
Eligibility and Requirements
Provided you have attained age 60, you can use your superannuation accumulation savings to commence a TTR pension, regardless of your employment status.
If you still have a TTR pension in place once you reach age 65, it should automatically convert to an ordinary account based pension – removing the upper income threshold and providing tax-free investment earnings within the account.
The reason a TTR pension converts to an ordinary account-based pension at age 65 is because age 65 is a full superannuation condition of release with no cashing restrictions, regardless of your employment status.
Commencing a TTR pension does not affect the number of hours you are able to work or the amount of income you can earn.
Ok, so now that you know what a TTR pension is, how do you start one?
How to Start a TTR Pension
To start a transition to retirement pension, the first step would be to contact your superannuation fund and see if they offer a transition to retirement income stream product.
If they do, you can compare it against the TTR pensions offered by other superannuation providers. If they don’t, you might choose a superannuation fund that does.
The next step is to decide how much of your super accumulation balance you would like to transfer to a TTR pension. Most people will transfer the majority and just leave enough in the accumulation account for the account to remain open so that contributions can continue to be made into it.
Another consideration is that, if you have insurances within your accumulation account, you want to make sure there is enough of a balance to continue funding the premiums.
Once you start a TTR pension, you will need to draw an income of between 4% and 10% of the account balance (pro-rata for partial years). Depending on what your super fund offers, you may be able to receive payments weekly, fortnightly, monthly, quarterly or a one-off payment annually.
How Much Should I Withdraw From a TTR?
As mentioned you will need to draw between 4 and 10% of your TTR account balance each financial year. This is then recalculated on 1 July of each year.
But how much should you withdraw? Well, basically you want to first calculate your expenses, then determine how much net income you’ll be receiving from all other sources and then the shortfall is what you will need to draw from the TTR pension.
Knowing that you must receive an income of between 4% and 10%, you can use a calculator to see how much of your super you should use to start a TTR pension, so that the income you need to draw falls between the required ranges.
A transition to retirement pension calculator like this one can help you calculate the minimum and maximum pension income amounts that you can draw down from a TTR Pension each year in order to optimise the income drawdowns to supplement other sources of income or implement a transition to retirement strategy.
What about tax? Is tax something you need to consider prior to commencing a TTR pension?
What are the Tax Considerations?
The tax considerations of transition to retirement pensions are quite simple. All TTR pension income is tax-free and all investment earnings within a TTR pension account are taxed at 15% (CGT is reduced to 10% if the investment sold was owned for longer than 12 months).
TTR Pension income has no effect on your personal marginal tax rates, but a TTR strategy can dramatically reduce your personal income tax obligations.
How To Reduce Your Tax With a TTR Pension Strategy
A transition to retirement strategy is a common strategy designed to minimise tax.
This is achieved by firstly commencing a TTR pension with the majority of your super balance, then salary sacrificing a portion of your wage into your super accumulation account in order to reduce your personal taxable income (and increase your super balance). Then using the tax-free income from the TTR pension to ensure you can continue to cover living expenses.
If you aren’t an employee or don’t have the option of salary sacrificing, you can make personal concessional contributions, instead, for the same outcome.
This video explains the workings of a transition to retirement strategy.
Should You Start a TTR Pension?
If you are planning to work beyond age 60, you should certainly be considering the benefits of a transition to retirement pension to reduce work, ease into retirement, minimise tax and increase your super balance. In fact, almost every Australian should start a TTR pension as they approach retirement.
Should you choose to start a transition to retirement pension, it’s important to review the investments that will support the pension each year, the balance and the required income drawdown to ensure.
Superannuation and taxation rules, including those relating to TTR pensions, are changing all the time. So it’s important to keep abreast of these and how it may affect your retirement plans.
Engaging the services of a financial adviser who specialises solely in retirement planning can help ensure your strategy is being implemented correctly.
At Toro Wealth, we specialise solely in helping 50 to 70 year-olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.
FAQ’s about Transition to Retirement Pensions
Can I Still Work While on a TTR Pension?
Yes, you can still work while on a TTR Pension. The whole purpose of a TTR Pension is to help you transition into retirement through partial access to your super without needing to retire. The only requirement for starting a TTR Pension is to have attained age 60.
How Much Tax Do I Pay on Transition to Retirement?
Transition to retirement pension payments are received completely tax free and do not affect your personal marginal tax rate. However, investment earnings within a transition to retirement account are taxed at 15%, with capital gains tax effectively reduced to 10% if the asset sold was owned for longer than 12 months.
What Are the Disadvantages of Transition to Retirement?
The main disadvantages of transition to retirement pensions include:
- Accessing super before retirement: by accessing your superannuation before retirement, you are reducing the amount you have to support your needs upon full retirement.
- Limited access: each financial year you will be limited to accessing 10% of your TTR pension balance.
- Tax on earnings: the tax rate on investment earnings within a TTR pension account will be the same as accumulation account – up to 15%.
- Two accounts: most people who have a TTR pension account will also have an accumulation account to accept super contributions. This adds complexity and potential costs.
How Much Can I Withdraw in a Transition to Retirement?
You can withdraw between 4% and 10% of your account balance from a transition to retirement pension each financial year. The 4% figure is pro-rata for partial years, but the 10% figure remains regardless of whether the TTR pension is in existence for a full or partial year.
How Old Do You Have To Be To Transition to Retirement?
You need to be at least age 60 to commence a transition to retirement pension. This is because age 60 is your superannuation preservation age.
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