Transition to Retirement
Once you have reached preservation age (currently age 57) and still working you can implement a Transition to Retirement Strategy (commonly referred to as TTR).
Note: With the changes to TTR pensions, we believe only those who are 60 and above should consider this strategy. However, if you are between 57 and 60 and require additional funds then this is still a viable option for you.
How It works:
- With part or all of your current superannuation balance you set up a retirement income stream (TTR pension). It will provide regular payments to you to help cover some of the living costs you incur. These regular payments may be completely tax free if you are over age 60 or if you are between the age of 55 and 60 may attract some tax but it is usually is less than what you are currently paying.
- You keep working and funds continue to be placed into your superannuation account by salary sacrificing some of your salary/wages. The amount contributed into your super fund is increased. As the amount is contributed pre-tax you end up paying less tax on your current salary/wages that your employer is paying you. You don’t need as much income from salary/wages as you are now receiving income from your TTR pension.
- By salary sacrificing into super before paying tax and by receiving income that has tax concessions applied to it, you end up paying less tax overall and still have enough income to cover your expenses.
To be able to benefit from a TTR pension the client must be between preservation age (age 56) and age 64 (inclusive). They also need to:
- Continue to work
- Be employed
- Able to salary sacrifice if a PAYG (employee); or
- If self-employed, able to make tax deductible super contributions
Transition to retirement income streams
A TTR pension or income stream is an account based income stream that can be made up of pensions and/or annuities or both. The TTR pension allows the withdrawal of the preserved and restricted non-preserved components of the TTR pension as lump sums until a subsequent condition of release is met. The restriction for a TTR pension is that the total payments in a single financial year can not be more than 10% of the total account balance and no less than 4% (rises as you get older). The 10% amount is based on the account balance as of the 1st July when the financial year first begins.
Key features of a TTR income stream
A TTR pension:
- must be set up using superannuation monies
- can only commence when the person reaches preservation age and not before
- may consist of preserved, restricted non-preserved and unrestricted non-preserved benefits. The person can choose to take preserved and non-preserved components in any proportion they wish. If a TTR pension commences from preserved, restricted non-preserved and unrestricted non-preserved components the TTR pension is deemed to come from the unrestricted non-preserved components first, then the restricted non-preserved component and finally the preserved component
- only lump sum withdrawals can be made from the unrestricted non-preserved component until condition of release is met. Once a condition of release is met the lump sum can be taken from any other component.
- must withdrawal a minimum payment amount of 4% of the account balance with in each financial year. The account balance is calculated on the 1st July of each financial year.
- does not require any payment to be made in the first financial year, if it commences in June of that financial year
This strategy is used to help increase a person’s super balance prior to retirement or it could also enable someone to reduce their work hours as they can receive a TTR pension to supplement some of their other income they decide to forgo.
While TTR pensions provide flexibility to develop strategies for clients making the transition to retirement, there are two important factors to consider:
- a TTR pension is assessed under the social security income stream rules. After 1 January 2015, Account Based Pensions are deemed for Social security purposes and a recipient of a benefit or payment who commences a TTR pension, may have their income support payments reduced. For those recipients in accumulation phase and under age pension age will have their super exempt when assessing entitlements under the income stream rules.
- not all product providers allow the client to set up TTR using their super monies. A client may need to move to a different provider prior to setting up the TTR pension.
Many financial planning institutions provide TTR calculators that you can use to provide the cash flow benefits of implementing a TTR strategy.
In 2016, the Government introduced new changes to Super. One of those changes had an impact on future TTR’s. Previously, the assets backing the TTR were not taxed. The new changes were introduced which meant that those assets backing the TTR pension are now taxed (similar to an accumulation super fund). This means that TTR’s set up prior to age 60 are not as beneficial as they use to be.
Article – Is a Transition to Retirement Strategy right for you? BT Select.
Transition to Retirement. Australian Super (http://www.australiansuper.com/retirement/planning-to-retire/transition-to-retirement.aspx)
Article – Transition to Retirement – Case Study. Challenger.