- Explanation of a TTR pension
- Worked example to explain financial benefit
- Key considerations highlighted
If you are over 55 and haven’t considered a Transition to Retirement (TTR) pension then you might be cheating yourself of an opportunity to significantly boost your retirement savings. Let’s explain why.
Once you reach your ‘preservation age’ (see box) you can use a TTR pension to access your superannuation as a non-commutable income stream while you are still working. This may be particularly attractive if you have reduced your working hours and need to top-up your income to maintain your standard of living. It’s also popular as a savings enhancing, tax efficient strategy approved by the ATO (refer account-based pensions, but with two important differences.
Firstly, they are non-commutable, which means they cannot be converted into a lump sum until you satisfy a condition of release, such as retirement or age 65.
Secondly, you have the normal non-concessional (after-tax) contribution of $9,653 to her super fund (or simply saves this amount) or;
Table 2 shows where the additional money comes from. It’s a combination of the tax savings from making super contributions, rather than earning salary, and the lower tax rate paid by the super fund.
|No TTR strategy||TTR strategy with salary sacrifice|
|Teresa’s Take Home Pay|
|Plus TTR income stream||$0||$4,500|
|Less salary sacrifice||$0||-$18,700|
|Less income tax & medicare (adjusted for TTR pension tax offset and other offsets)||-$15,347||-$9,681|
|NET INCOME (Before after-tax contributions)||$54,653||$46,119|
|Less after-tax contributions to super||-$9,653||-$1,119|
|NET INCOME (Take home)||$45,000||$45,000|
|Reduction in personal tax (1)||$5,666|
|Effect on Super Account|
|Salary sacrifice contribution||$18,700|
|Less contribution tax (15 %) (1)||-$945||-$3,750|
|Less TTR pension||-$4,500|
|Net contribution to super per annum||$15,008||$17,869|
|Net increase in super with TTR||$2,861|
|Super balance $150,000|
|Tax on net 5% earnings||$1,125||$0|
|Tax saved in super with TTR||$1,125|
|1. Although Teresa saves $5,666 in personal tax she pays an additional $2,805 contributions tax.|
|2. These are approximate figures. Actual results will depend on when amounts are contributed, pension payments taken and actual investment returns.|
How do you start a TTR pension?
The financial benefits are attractive. The obvious next question is ‘how do I start?’
Fortunately, it’s pretty simple. Once you meet your preservation age you just need to complete a pension application for your fund and tell them you wish to start the pension, if it is to be reversionary or not, what pension amount you wish to receive and if the payment is required monthly, quarterly or annually. In many cases funds can now roll over your existing investments to pension stage but you should review your asset allocation and risk tolerance at this stage.
If you have an SMSF then you need what is referred to as a “Pension Kit” and it follows the same process – application, initial agreement by trustees documenting the pension, providing the Product Disclosure Statement and a finalised pension agreement once the annual financials of the fund have been completed.
Is a TTR pension right for you?
TTR pensions can provide you with flexibility in the years leading up to your retirement and, depending on your circumstances, can help to boost your retirement savings.
People who might find TTR pensions attractive include those who have reduced their working hours from full time to part time (for instance, only working three days a week) and those who are able to salary sacrifice to superannuation. In both cases, the reduced salary is topped up with the income from the TTR pension.
The same rules apply to a self-employed person making personal concessional contributions rather than salary sacrifice.
The transition to retirement rules and associated strategies can be very complicated. If you have questions please post them on Q&A. But remember to seek personal advice on your situation prior to proceeding.