Transition to retirement – how can it work for you?
When you’re not quite ready to retire…
The good news is you can keep working while drawing down some of your super benefits. This is known as transition to retirement (TTR) and it allows you to supplement your salary and maintain your lifestyle while reducing your work hours, or salary sacrificing into super to save on tax.
How a transition to retirement pension can work for you
A ‘transition to retirement’ (TTR) pension is a way of accessing your super while you are still working. However, you must have reached your preservation age (between 55 and 60) to start a TTR pension.
How do I get started?
You start a TTR pension by transferring some of your super accumulation account to a super account-based pension. You will need to leave at least a small balance in your accumulation account so that it remains open to receive ongoing employer super contributions and any voluntary contributions you make.
There are complex and binding rules with a TTR pension. If you are younger than 65, you draw down a pension income of between 4% and 10% of the pension account balance each financial year, to supplement your employment income. You cannot withdraw a lump sum, but the good news is your TTR pension can be rolled back into your super accumulation account at any time.
Most super funds offer a pension option, however if your fund doesn’t you can open a pension account with a different super fund. Before you do, make sure you speak to one of the Retirement Specialists at MoneyLink.
Tax on Transition to Retirement (TTR) pensions has changed
Starting 1 July 2017, the investment returns on TTR pension accounts will be taxed up to 15%, just as they are in a super accumulation account. However, the tax on pension income will not change. See the Australian Tax Office (ATO) website for more information on the changes and how they will affect you.
Using a TTR pension to reduce work hours
As you approach retirement you might like to reduce your work hours without taking a big cut in your pay. A transition to retirement pension can be used to top up your employment income if you decide to reduce your work hours.
- Ease into retirement – Explore new hobbies and start planning what you will do with your extra leisure time before you retire completely.
- Supplement employment income – If your reduced income is not quite enough to maintain your current lifestyle a TTR pension can top it up.
- Receive contributions – You will continue to receive employer contributions which will help balance out the amount you take out in pension payments.
- Pay less tax on income – If you are aged 60 or older, in most cases, your pension payments will be tax-free. If you are aged 55-59 then the taxable portion of your pension payments will be taxed at your marginal tax rate, however you will receive a 15% tax offset.
- Less money in retirement – If you start drawing down your super early it may impact the lifestyle you can achieve when you do stop work altogether.
Using a TTR income stream to maintain work hours and save tax
A TTR pension can be used in conjunction with increased concessional super contributions to save tax in the lead up to retirement.
- Grow your super – Your super balance will get a boost through increased concessional contributions. Your employer will continue to make contributions and you can make voluntary salary sacrificed contributions to your super account.
- Pay less tax on contributions – Employer contributions and salary sacrificed contributions are taxed at a low rate of 15% when they are received by your super fund. As this is likely to be lower than your marginal tax rate you will save tax by making pre-tax (salary sacrifice) contributions.
- Pay less tax on income – If you are aged 60 or older, in most cases, your pension payments will be tax-free. If you are aged 55-59 then the taxable portion of your pension payments will be taxed at your marginal tax rates, however you will receive a 15% tax offset.
What about the drawbacks?
Depending on your circumstances the benefits may not be worth all the trouble. This strategy works best if you are aged 60 or older and are a mid to upper middle income earner.
What to consider before starting a TTR income stream
Before you set up a transition to retirement pension, you need to consider if this type of income stream is right for you and how it fits with your work and super plans. Here are some things to think about:
- Check your fund type – TTR pensions are only available for members of accumulation super funds. Members of defined benefit super funds cannot access a TTR pension.
- Work out your retirement strategy – Do you want to cut back on work or do you want to save tax? How will this strategy work with your overall retirement plans.
- Decide on your income needs – You may not need to replace all of your current income. Often people find their income needs reduce as they get closer to retirement and they can afford to salary sacrifice into super, or reduce work hours, without having to replace the lost income.
- Check your social security entitlements – If you or your partner are receiving social security benefits, speak to your financial adviser or a Department of Human Services’ Financial Information Service (FIS) officer, as there may be implications for you or your partner’s pension and other entitlements.
- Check on your life insurance – If you have life insurance with your super fund, check with the fund or your financial adviser to make sure your life cover does not reduce or cease.
If you’d like to move forward with the transition to retirement flexible option, allowing you to work longer and retire later, contact your MoneyLink Retirement Strategist, as it can sometimes be complex.
Why not be rewarded for staying in the workplace?
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