Explore a transition to retirement strategy using Industry Super’s TTR calculator

Introduction

The Industry Super Funds transition to retirement calculator can be used to model three different scenarios where using a transition to retirement pension may be helpful. Transition to retirement pensions are available to people who are aged at least 60 but have not yet turned 65. I’ll take you through each use case to show you how this calculator works.

Option 1: Keep working and grow your super

First, let’s look at the option to keep working and grow your super. We can select that from the front page of the calculator. Then you just need to enter some basic details about yourself. First, your age. I’ll use 60, which is the youngest you can be to start a transition to retirement pension. Then you need to enter your salary.

I’ll use $80,000 per year. You can select a different frequency for your salary if that’s easier for you, but it’s important to put in your pre-tax income, so not what hits your bank account after tax, but the gross amount before tax is deducted. Then you need to put in your superannuation balance. I’ll use $250,000 in this example, and that’s all you need to do. It’s very little information to collect, and then you can go ahead and press the continue button to see your results.

The results here show you what would happen if you’re not currently making any super contributions but you wanted to start saving in super and couldn’t afford to reduce your take-home pay. That’s the scenario it’s modelling, and it’s showing you that to make those contributions affordable, you could choose to withdraw a tax-free income from a transition to retirement pension. That extra tax-free income coming in would make it affordable for you to start making super contributions on a before-tax basis.

That would reduce your income tax and also reduce your take-home pay. You’re replacing some of that take-home pay with the tax-free income from super. The calculator assumes you want to target taking home exactly the same amount as you are currently, while not making any super contributions.

You can see it’s broken that down into a current scenario and a with-TTR scenario. Both have the same total yearly after-tax income. In the TTR scenario, you’re putting nearly $23,000 per year into superannuation on a before-tax basis. There are two ways to do that. You could choose to salary sacrifice through your job, or you could make contributions from your bank account and claim a tax deduction for those contributions.

The simplest way is via salary sacrifice with your employer, if they offer it. The reason is that you get your tax benefit straight away. It reduces your take-home pay immediately. You don’t need to wait until the end of the financial year when you do your tax return to get a tax refund to receive your tax benefit.

To replace the income you’re salary sacrificing, you would draw a transition to retirement income from your super. You can see you’re taking out less than you’re contributing, and that’s because putting in that level of contribution only reduces your take-home pay by the lower amount.

In this example, it would go down by around $15,400 after tax, so you could draw that $15,400 from the super pension to replace your take-home pay. Your total tax savings per year, as shown here, are around $4,000 in the first year. And your projected final superannuation balance is higher than it would be if you didn’t use the strategy.

That’s because with the strategy you’re putting in more super contributions than you’re taking out, and that tax saving is what boosts the superannuation balance you’ll have at retirement. It’s projecting that to age 65 automatically. You might retire later than that and therefore have a higher super balance.

The reason it’s using 65 is that that’s when you stop being able to use a transition to retirement pension. They’re available between age 60 and 65. Once you turn 65, you have the option to convert your pension into a pension for retirement, which means it no longer has a maximum withdrawal.

A transition to retirement pension only allows you to withdraw a maximum of 10% of your account balance each year, and this calculator takes that into account. Once you turn 65, if you do still have a transition to retirement pension, it automatically converts into a retirement pension. If you don’t want that to happen, you would need to close it before that time and put the money back into an accumulation account, where you’re making your super contributions.

Once you’ve had a look at this, you can decide if it’s something you want to put in place. To move on to step four, you just press the continue button. It tells you a little more about the assumptions the calculator has used, and then refers you to talk to your super fund if you want to put the strategy in place.

The other important thing to know about this part of the calculator, and in fact the calculator as a whole, is that it will never model you contributing more than the annual concessional contribution cap into your super. That’s important because you might have the option to contribute more than the cap using a measure called carry-forward, and that could make your transition to retirement strategy even more powerful.

You could salary sacrifice a larger amount into your super without going over the concessional cap if you have the ability to use the carry-forward rule. That’s possible when your total superannuation balance on 30 June is less than $500,000 and you haven’t contributed up to the full concessional cap in any one of the past five financial years. Even if you’ve used up the whole cap in some years, if you haven’t used it in others then you would have carry-forward available. Unfortunately, this calculator can’t take that into account. It just assumes you can only contribute up to the maximum of the cap. If you’re a SuperGuide member, you can have a look at our article on transition to retirement, which has some more examples showing how it can work in combination with carry-forward so you can understand that a little better.

A couple of other things to remember about this function of the calculator. It’s also assuming you’re not currently making any contributions to your super, so if you’re already contributing, it may not work well for you. It also assumes you need to target the same take-home pay. If you can actually afford to reduce your take-home pay and contribute more, and/or draw less from your transition pension, that’s something you would need to consider as well. It’s not really suitable for the full range of scenarios.

Option 2: Reduce your work hours

Starting over, let’s look at option two, which is to reduce your work hours. As it explains here, this is going to model your option to work fewer hours and use the income from your transition to retirement pension to top up your take-home pay, so you don’t need to live on a lower salary after reducing your work hours.

If we select this option, again we need to put in our age, our salary and the superannuation balance. I’ll use the same figures as before, then put in the current number of hours you’re working. Let’s say it’s 38, which is a full-time workload. What if you wanted to work one less day a week, and so only work around 30 hours a week instead of 38?

What the calculator is going to work out here is this: if you wanted to still take home the same amount of income as you were when you were working your previous hours, how would you do that with a transition to retirement pension, and what would the impact be on your final super balance? If we press continue, we can see that model.

It’s a very simple model. It’s only assuming you want to take home the same amount as you were before, and how you’re going to make that happen is by drawing a tax-free income from your super to replace what you’re no longer earning from work. That’s what it’s showing you in the current scenario versus the with-TTR scenario.

It’s showing you that your projected super balance at age 65 will of course be lower, because you’ve started to withdraw money from your superannuation early instead of waiting until you were retired to do that.

The downside with this calculation is that it’s not showing you the full range of what you could actually do with a transition to retirement pension in this scenario, because you can combine more than one strategy. You could reduce your work hours and draw an income from super to replace that income, certainly. But you may still have the capacity to also make some salary sacrifice contributions to super and withdraw additional income from your transition to retirement pension, to keep you on the same take-home pay, or whatever pay it is that you need to have an affordable life.

So you could still be boosting your superannuation by making those contributions at the same time that you’ve reduced your work hours. This calculator isn’t sophisticated enough to model that kind of scenario. It’s just showing you what would happen if you simply cut your work hours and drew a replacement income from super to keep you at the same take-home pay.

It is quite simple. You can also come further down here and adjust the reduced working hours if you like. This is reducing your work down to 30 hours a week. What if you wanted to go down to 25 hours a week? You can enter that and then press update, and it’ll change the figures for you so you can see the impact that might have.

Option 3: Get extra income from your super

Back to the beginning again. Let’s look at the last option, which is simply to get extra income from your super. While we’re looking at this one, I’ll also show you where to find the assumptions of the calculator, which are in the same place in all three types of scenarios, and how you can change them.

Let’s select this “get extra income from your super” option. All the tool is modelling here is that you don’t want to have to retire to access your super, but you’d like to start making some withdrawals. You’re not going to make any contributions at all. You simply need extra income coming in on top of what you’re already earning.

Let’s use the same information as before, our $80,000 salary and $250,000 super balance. I’ll also show you what happens if you put in a withdrawal amount more than the maximum. The amount this individual wants to withdraw per year is $12,000, so an extra $1,000 a month coming in just to support what they need for spending.

Then you can press continue and it will show you the current scenario versus a with-transition-to-retirement-pension scenario. Of course, your final super balance is going to be lower, because what you’re doing is starting to make withdrawals from your superannuation early, before retirement, and you’re not putting in any contributions to replace that.

Again, what it’s not modelling here is the possibility that you could still have an extra $12,000 income per year and also make some super contributions along with that, by salary sacrifice or by claiming a tax deduction for some contributions from your bank account, and withdraw even more from your transition to retirement pension to replace the income you’re sacrificing from those contributions. You certainly could do that, combining the strategies. This calculator is not sophisticated enough to do that. It’s simply going to show you what would happen if you went ahead and made those withdrawals and didn’t combine that with any additional super contribution.

You can again adjust your plan here, and change the amount per year you’d like to withdraw. Let’s put in $28,000 per year, which is above the maximum for the first year. The total balance is $250,000, which means the maximum withdrawal is $25,000, which is 10% of that. If we put in more than that and press update, you’ll see it’s restricted your withdrawals down to the lower figure of $25,000, which is the maximum, and it puts up a warning at the top saying the rules limit the maximum amount you can withdraw, so you can’t attain the scenario you’ve put in.

Assumptions and disclaimer

Now let’s look at the assumptions. They’re at the bottom of all the pages. You can click “edit disclaimer and assumptions”. This is the full disclaimer here. You should always read through any disclaimers and assumptions before you use any calculator, and certainly before you interpret the results.

The assumptions you can change are here. You need to click this other tab and you can edit the assumptions if you want. This is wage inflation, how much your wage is expected to increase every year; any insurance premiums you’re paying in your super; and the amount your employer is contributing. If you’re self-employed and your employer doesn’t make any contributions, you could change that to zero. Or if your employer contributes more than the minimum 12%, you could change it to a higher number.

It’s also showing you that it’s modelling an investment return of 6%. If you’d like to choose something different, you can choose your own option here. A high growth option would model 6.5%, or a cash option would only model 2.9%. Or you can put in your own figure, and the fees at the bottom here, so your administration fees in your super fund, just to tailor it a bit more to yourself.

Those assumptions are going to affect the final superannuation balance it shows you. They won’t affect the strategy numbers around what the tax advantage is per year, for example in the first scenario we looked at.

I hope that has been helpful, and you can go and have a look at this Industry Super transition to retirement calculator for yourself and see if it’s helpful to you.