Guide to Transition to Retirement Pensions (TTRs)

Guide to Transition to Retirement Pensions (TTRs) + Case Study

A transition to retirement strategy could help you boost your retirement savings.  Do you want to lower your working hours while still being financially comfortable? Or, would you prefer to continue working full-time for some time and boost your super?

A transition to retirement pension strategy might work for you. It will help you minimise tax and give you options.

What is transition to retirement (TTR)?

A transition to retirement (TTR) pension is a strategy that helps you access your super while you continue to work. It’s a flexible way of boosting your savings before retirement or maintaining your income while reducing work hours.

Note: You may see people mention a transition to retirement income stream (TRIS). A TTR and a TRIS are the same thing.

What age is transition to retirement?

To access your super through a transition to retirement strategy, you must have reached your preservation age (between 55 and 60, depending on when you were born). Once you reach your age bracket, you can transition into retirement and access your super.

Date of birth Preservation age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 1 July 1964 60

How is a TTR pension strategy taxed?

If you’re aged 60 or older, income from your TTR income stream is tax-free.

If you’re under 60, income from your TTR income stream is taxed at your marginal tax rate with an offset of 15%.

If you’re 65 or older, income from your TTR income stream is tax-free AND the investment earnings on your pension are tax-free.

To know your options, you first need to understand how salary sacrifice works.

Understanding Superannuation Salary Sacrifice

A great way to boost your superannuation is to salary sacrifice money. Essentially, you put a portion of your salary (or wage) into your super account instead of your bank account.

When money is paid to your bank account, your employer withholds income tax at your marginal tax rate (MTR) which could be 21%, 34.5%, 39% or 47% (includes 2% Medicare levy) depending on your income. The higher the income, the higher the MTR.

When money is contributed to superannuation via salary sacrifice, the super fund pays a 15% contributions tax to the Australian Tax Office.

So, the benefit received from salary sacrificing is MTR – 15%.

Salary Sacrifice Example

Let’s take the example of Bob (60) who is on a salary of $100,000 per year and has superannuation of $200,000.

Let’s assume that Bob salary sacrifices right up to the annual concessional contributions limit of $25,000, keeping in mind that Bob’s employer contributions (9.5%) count toward this limit.

The tables below show the impact that Bob’s salary sacrifice has on his take-home pay as well as his superannuation.

SUPER

  No Salary Sacrifice Salary Sacrifice
Employer super contributions $9,500.00 $9,500.00
Salary sacrifice contributions $0.00 $15,500.00
Less Contributions Tax $1,425.00 $3,750.00
NET GAIN IN SUPER $8,075.00 $21,250.00

 

INCOME

  No Salary Sacrifice Salary Sacrifice
Salary  $100,000.00 $100,000.00
Salary Sacrifice $0.00 $15,500.00
Taxable Income $100,000.00 $84,500.00
Income Tax Estimate $25,717.00 $19,620.00
TAKE HOME PAY $74,283.00 $64,880.00

As you can see, Bob’s super increases by $15,500 – less the 15% contributions tax ($13,175)

While his super increases, his take home pay decreases by $9,403 per year, or approximately $180 per year.

While Bob is happy that his superannuation is likely to receive a huge boost, he is not happy that his current lifestyle is going to be impacted.

Bob would like to boost his super but would like to maintain his current lifestyle.

How does he do this? A transition to retirement pension strategy.

Example Transition to Retirement Pension Strategy

Let’s look at the case study of Bob to understand how a TTR pension strategy can help Bob continue working and boost his super at the same time.

Bob’s financial adviser recommends that Bob start a transition to retirement pension using his super.

Bob’s financial adviser recommends leaving about $5,000 in his super account and using the remaining $195,000 to start a TTR pension.

Because Bob is over age 60, he can draw up to 10% of the starting balance of his TTR pension TAX-FREE.

So, how does a TTR pension affect Bob’s super and take-home pay:

SUPER

  Current TTR Strategy (age 60)
Employer super contributions $9,500.00 $9,500.00
Salary sacrifice contributions $0.00 $15,500.00
Less Contributions Tax $1,425.00 $3,750.00
Less TTR Pension drawdown $0.00 $9,403.00
NET GAIN IN SUPER* $8,075.00 $11,847.00
BENEFIT OF TTR (1ST YEAR) $3,772.00
*Ignores investment returns for simplicity

 

INCOME

  Current TTR Strategy (age 60)
Gross Income $100,000.00 $100,000.00
Less Salary Sacrifice $0.00 $15,500.00
TTR Pension Income $0.00 $9,403.00
Taxable Income $100,000.00 $84,500.00
Less Income Tax and Medicare $25,717.00 $19,620.00
TAKE HOME PAY $74,283.00 $74,283.00

As you can see from the above tables, Bob’s super receives a boost, but because he can replace some of the income, he has salary sacrificed into super with tax-free pension income, his take-home pay is unaffected.

This is only one application of a TTR pension. TTR pensions can be used to pay down high-interest debt as well as enable workers to work part-time while accessing some of their superannuation tax-free.

Is transition to retirement worthwhile?

Before you set up a transition to retirement pension strategy, you should consider if this type of income stream is right for you and your future. A TTR strategy can help you grow your super, and help you pay less tax on contributions and income. However, there are several things you need to consider:

  • What do you want from your retirement strategy? – do you want to reduce your work hours, or would you prefer to continue working full-time and salary sacrifice? Work our what is right for you.
  • Think about your income and needs – look at your current income streams and your needs long-term, as you might not need to replace any income going to salary sacrifice or reduced work hours. Many people find their income needs reduce as they near retirement.
  • Speak to your financial adviser – a registered financial adviser can provide you with TTR advice in the context of your overall retirement planning.

What are the disadvantages (or downsides) of a TTR pension strategy?

Remember, the benefits of a TTR will depend on your circumstances.

Before you start one, consider your long-term retirement plan and work out how long your super account with last into your retirement. Will it support you? You ideally want your savings to last throughout your retirement.

With a TTR, you need to withdraw a minimum of 4% a year and can access a maximum of 10%. This is important to note because this is added to your taxable income (if you are under 60).

For members of a couple, where one member is on the Centrelink age pension and the other member is under age 65, a TTR pension may have unintended consequences.

Is a transition to retirement right for you?

If you’re nearing retirement and want to set yourself up with a transition strategy for the long term, speak to a financial adviser. Brett at Online Super Advice can run you through a TTR pension and help you decide if this strategy is right for you.

Brett is a financial planner and educator who has worked in the financial services industry for over 20 years, and specialises in superannuation and retirement planning. Brett makes the complex simple and convenient.

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GENERAL ADVICE WARNING: Unless specifically indicated, the information contained in this website is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek personal advice from a financial adviser.