Benefits of a transition to retirement pension
A transition to retirement (TTR) pension provides you with the ability to withdraw from your super without having to give up work. So, essentially you can reduce your working hours while taking home the same income.1
And the benefits don’t end here.
Depending on your super, some of the money you withdraw as a TTR pension may be tax-free. The rest is assessed at your marginal tax rate (can be up to 47 per cent including Medicare levy), but with a 15 per cent tax offset.2
Once you turn 60 however, any money you withdraw from your super is completely tax-free.
Sound good?
Before you decide if this is the right option for you, here’s a few things to note.
Changes to tax concessions
Prior to 1 July 2017, any investment earnings funding your TTR pension were exempt from tax.
Today however, things have changed.
TTR pensions are no longer considered a superannuation income stream in the retirement phase. As a result, any earnings on those assets are subject to 15 per cent earnings tax3, which applies to super generally.
These changes have therefore reduced the overall tax effectiveness of TTR pension strategies, especially when combined with further limitations on how much you can contribute to super.
It’s important to note though, the tax you pay on investment earnings outside super can be higher4 so there’s still potentially a benefit here.
How it could work for you
One of the extra steps some people with a TTR pension have taken is to make additional contributions to their super using their before-tax income. This helps to reduce their taxable income, but it also reduces their take home pay. By using the income from their TTR pension, they’re able to supplement it so they’re not losing out.
What about if you decide to continue working full time and are unable to make additional contributions to your super?
Well, receiving an income from a TTR pension may still be handy for other purposes. For example, paying off non-deductible debt such as a home loan or credit cards, could lessen your financial burden or better still, completely remove it by the time you retire.
The conditions
There are a few conditions attached to TTR pensions if you choose to take it on.
Condition 1: Your age
To be eligible for a TTR, you must have reached your "preservation age." This is the minimum age that you can access your super.
Currently, the preservation age is 58, although it started at 55 and is gradually rising to 605. But it actually depends on when you were born - if were born on or after 30 June 1964, you’re required to wait until you turn 60 to be eligible for a TTR.
You can use the Moneysmart calculator to find out when you can access your super.
Condition 2: Access to super as an income stream
The second condition is that you can only access your super in the form of an income stream, drawing between 4 per cent and 10 per cent each year6. However for the 2019-20 and 2020-21 financial years, the minimum pension payment has been reduced to 2% as part of the governments response to COVID-19.
This means you can’t access any of your super as a lump sum. All of that changes however, once you meet a standard requirement to access your super, such as completely retiring or turning 65.
Start planning for your retirement early
Let’s face it, your retirement years shouldn’t be trying times – they should be enjoyed.
So, the best way to maximise the benefit of a TTR pension is to start planning early. The more you can save in super, the better opportunities you’ll have in retirement.
Bottom line:
A TTR pension is an option that allows you to have more flexibility with your work hours while potentially boosting your super and cutting down your tax. It can be complex though, so you may want to consider discussing your options with your financial adviser.
You can also learn more about the benefits of TTR strategies.
Next: Wind down your work days sooner
1 https://www.moneysmart.gov.au/superannuation-and-retirement/income-sources-in-retirement/income-from-super/transition-to-retirement
2 https://www.ato.gov.au/individuals/seniors-and-retirees/transition-to-retirement/
3 Current as at 8 November 2018: https://www.ato.gov.au/individuals/super/in-detail/super-changes---faqs/?page=1#Transition_to_retirement_income_streams
4 https://www.moneysmart.gov.au/investing/invest-smarter/choose-your-investments/make-tax-work-for-you
5 https://www.ato.gov.au/rates/key-superannuation-rates-and-thresholds/?page=11
6 https://www.ato.gov.au/Individuals/Super/In-detail/Withdrawing-and-using-your-super/Withdrawing-your-super-and-paying-tax/?anchor=Super_withdrawal_options&anchor=Super_withdrawal_options#Super_withdrawal_options
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The article was prepared by Bryan Ashenden, Technical Consultant at BT - Part of Westpac Banking Corporation ABN 33 007 457 14, and is current as at 30 September 2020.
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