Why you need a Transition to Retirement Strategy

If you’re eligible for a TTR pension but don’t have one, it’s probably costing you money. We explain why.

Key Points

  • 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.

Background

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;

  • Option 2: She salary sacrifices up to her $25,000 concessional cap limit ($18,700 after allowing for her employer contributions) and also starts a TTR pension, drawing the minimum allowable pension payment of $4,500 (3% of her balance) annually in June. This will allow her to maintain her $45,000 take home pay and end up with an extra $3,986 in her super account.
  • 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
    Table 2: Comparing Teresa’s situation with/without TTR strategy
    Teresa’s Take Home Pay
    Salary $70,000 $70,000
    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    
    Employer contribution $6,300 $6,300
    After-tax contribution $9,653 $1,119
    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
         
    Notes:     
    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.

    Want access to our latest research and new buy ideas?

    Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

    Sign up for free

    Join the Conversation...

    There are comments posted so far.

    If you'd like to join this conversation, please login or sign up here

    Related Articles