Transitioning to retirement

If you’re nearing retirement, you may be able to reduce your work hours but retain the same income.

Through a transition to retirement (TTR) pension you can choose to work less, or continue working the same hours while making your own contributions into super. In both cases, you can use the income from your TTR pension to supplement any reduction in your take-home pay.

In this article, we’ll explore how a TTR pension works including some of the restrictions and potential benefits. 


 

How a TTR pension works

A TTR pension enables you to access your super before you retire, once you’ve reached your preservation age—between 55 and 60 depending on your date of birth.

It can be used in two ways:
 

1. Reduce your work hours

A TTR pension can be used to gently transition into retirement by remaining in the workforce but on a part-time basis.

To maintain the same level of income, a TTR pension allows you to make up the difference in lost income from your super. And as you’re still employed, your super savings will continue to be contributed to as well.

Case study example

Ben is 60 years old and currently earns $100,000 a year before tax. He decides to ease into retirement by reducing his work hours to three days a week. This means his income will drop to $60,000 a year before tax.

He decides to transfer $200,000 from his super into a TTR pension. He then withdraws $20,000 a year, tax-free until he retires. The amount in the TTR pension will replace some of his lost salary, until he decides to retire from the age of 65.

2. Boosting super and saving tax

A TTR pension can be used to grow a super balance and save on tax while working full time.

When you sacrifice some of your salary into super, or make your own contributions, each contribution is taxed at a rate of 15%. There is also a cap on how much you can contribute which is generally up to $27,500 per year.1

For those aged 60 or over, on a marginal tax rate that’s higher than 15%, this may be a valuable strategy to boost a super balance.

For those earning around or above $250,000 per year, some or all these contributions may be taxed at 30% (rather than 15%). However, as this marginal tax rate will be 47% (including Medicare Levy), tax savings will still generally be available.

Case study example

Samantha is 60 and earns $100,000 a year. She intends to keep working full-time for at least another five years.

As she wants to increase her retirement savings, she decides to open a TTR pension. She transfers $100,000 from her super account into a pension account.

Samantha then gives up some of her salary to make additional contributions into her super on a regular basis. This reduces her total income for the year which also reduces her income tax.

Tax on a TTR pension

Once reaching 60, pension payments are tax-free. However, at 55 to 59, your pension payments are taxed at your marginal tax rate, but you will receive a 15% tax offset.

Investment earnings from a TTR pension are taxed at a maximum rate of 15%.
 

Considerations

Before taking out a TTR pension, it’s important to be aware of the potential drawbacks that this approach could have:

  • Withdrawal restrictions
    – minimum of 2% must be withdrawn (4% from 1 July 2022) of a TTR pension account balance each year for those aged under 65. There is also a maximum withdrawal limit of 10%

    – at least one withdrawal must be made each year

    – generally you can’t access your super as a lump sum payment while still working. It must be taken as regular payments

  • Reducing retirement savings –drawing down on super may reduce the amount of retirement savings you have left to fund your eventual retirement

  • Loss of work – keep in mind the possibility of your career not going exactly to plan. A redundancy or a forced early retirement could interrupt a TTR pension, so you may need to review it with a financial adviser

  • If you or your partner currently receive any social security payments, a TTR pension may affect your entitlements

  • Your fund may require a minimum amount to be left in your super account to maintain insurance cover

  • a small balance must also be left in a super account so it remains open to receive employer’s compulsory 10% super guarantee contributions or any of your own contributions.

     

Starting a TTR pension

Different super funds have different ways of setting up a TTR pension so it’s worth talking to your fund if you are considering this option.

Super savings will need to be transferred into a pension account where the TTR pension is paid from.

It is important to note that once you’re retired, there is a limit to how much you can transfer into a pension account. This means whatever is transferred into a TTR pension could eventually count towards this cap—currently $1.7 million. For those aged under 65 and still working however, there is no limit on how much can be transferred into a TTR pension account.

Seek help from a professional

With the help of a financial adviser, they can review your financial situation to determine if this approach is the right one or if there are other ways of achieving what you’re after.

They can also help you with other aspects of your financial life—savings, insurance, tax, debt—while keeping you on track to achieve your goals.

More importantly, they can answer questions like:

  • What age can I stop working and retire?
  • What strategies can I use to build my wealth?
  • How can I ensure my wealth is transferred to my children?

If you value the experience of experts in other aspects of your life, don’t discount it when it comes to managing your life savings. Contact us on 02 9554 3566.

1 As at July 2021: https://www.ato.gov.au/super/self-managed-super-funds/contributions-and-rollovers/contribution-caps/

Important information and disclaimer

This article has been prepared by NULIS Nominees (Australia) Limited ABN 80 008 515 633 AFSL 236465 (NULIS) as trustee of the MLC Super Fund ABN 70 732 426 024. NULIS is part of is part of the group of companies comprising IOOF Holdings Ltd ABN 49 100 103 722 and its related bodies corporate (‘IOOF Group’). The information in this article is current as at October 2021 and may be subject to change. This information may constitute general advice. The information in this article is general in nature and does not take into account personal objectives, financial situation or needs. You should consider obtaining independent advice before making any financial decisions based on this information. You should not rely on this article to determine your personal tax obligations. Please consult a registered tax agent for this purpose. Opinions constitute our judgement at the time of issue. The case study examples provided in this article have been included for illustrative purposes only and should not be relied upon for decision making. Subject to terms implied by law and which cannot be excluded, neither NULIS nor any member of the IOOF Group accept responsibility for any loss or liability incurred by you in respect of any error, omission or misrepresentation in the information in this communication.

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