Transition to retirement Q&As

You can commence a TTR with as little or as much as you wish, just check with your super fund or review your SMSF trust deed for any rules that may be applied by the fund.

TTRs are not considered to be “retirement phase income streams,” therefore the transfer balance cap that limits the amount that can be used to start a pension, does NOT apply to TTRs.

Q: Do I still need to be working to commence a TTR pension?

The TTR rules allow restricted access to superannuation balances once you have reached your preservation age, regardless of your work status. However, if you are not working and are retired, then you may be able to access your super by using another condition of release, without the need to use a TTR pension.

For instance, if you have reached your preservation age and are fully retired, you can access all your super by way of a retirement phase pension or even as a lump sum; you would not need to use a TTR. The same would apply where you have turned 65, regardless of your work status.

Your preservation age is determined by your date of birth and from 1 July 2024 the preservation age increased to age 60. Therefore, if you are looking to start a TTR pension at any time in the future, you will need to be at least 60 years old.

Q: Are transition to retirement pension payments tax free?

Pension payments that you receive before age 60 may be subject to tax, depending on the tax components that make up each pension payment. Keep in mind that pension payments are paid proportionately from the relevant tax components that make up the pension balance.

These tax components include:

• Tax-free component: These amounts come from your after tax (non-concessional) contributions into your super account. Pension payments made from your tax-free component are received tax free, there is no tax payable on these amounts.
• Taxable component: These amounts come from your concessional (before-tax) contributions, including employer contributions, salary-sacrifice contributions, and any personal super contributions for which you claimed a tax deduction. This component also includes all investment earnings related to your accumulation account.

If you are under age 60, the taxable component of your pension payments is included in your assessable income and taxed at your marginal tax rate, but you receive a 15% tax offset.

If you are 60 or older, the taxable component of your pension payments is received tax free.

Q: Are the fund earnings on my transition to retirement pension payments tax free?

No. Super fund earnings on assets that support TTR pensions are NOT tax free. The super fund will need to include any relevant fund earnings on these assets in their assessable income and pay the appropriate levels of tax.

This is because TTRs are not considered to be retirement phase income streams.

When the recipient of a TTR meets a further condition of release such as retirement or age 65, their TTR will become a retirement phase TTR and at that time, the relevant fund earnings will become tax free.

Q: How do I commence a TTR pension?

If you are a member of a retail or industry super fund, you should contact your fund and follow their pension commencement process. This would usually involve completing a pension application and nominating how much of your super balance you will be using to start your TTR pension.

For SMSF members, you will need to review your fund’s trust deed and follow all requirements set out for the establishment of a pension. Again, this would usually involve completing a pension application form and trustee minutes or resolutions. There would also be other administrative requirements that need to be addressed, for instance valuing the fund’s assets and bringing the fund’s financial accounts up to date so as to determine the member balance in the fund.

Q: Why have a transition to retirement strategy if you have enough income now for your means?

TTR pensions are completely optional. You are not forced to start one when you reach your preservation age, and those who already have sufficient income from other sources may not need to supplement their income with a TTR pension.

However, there may be other benefits in using one of the various TTR strategies, including:

• A tax strategy by making salary sacrificed contributions to super which are usually taxed at 15% rather than marginal tax rates and supplementing this income with tax-free pension payments from a TTR pension, where you are over age 60.
• Using a recontribution strategy to reduce or eliminate debt sooner.
• Estate planning strategies around the members tax components within the fund.
• Using TTR payments to equalise spouse super balances.

Q: I am turning 65 in a few weeks time, and I am still working. Can I commence a transition to retirement pension when I turn 65?

Turning 65 is a condition of release that allows full access to super benefits, so there would be no need for a 65-year-old to commence a TTR pension.

Instead, a 65-year-old would be eligible to start a retirement phase income stream.

Q: What restrictions apply to a transition to retirement pension?

There are annual limits imposed on the amounts that can be paid from a TTR pension:

• A minimum pension payment of 4% must be paid each year; and
• A maximum pension payment of 10% applies each year.

These minimum and maximum pension percentages are applied to the pension value at the start of the pension in the year that the pension is established and then applied to the 1 July pension balance for each year after.

Where a TTR pension begins on a day other than 1 July, the minimum pension amount is pro-rated based on the number of days remaining in the financial year.

Lump sum payments, often referred to as lump sum commutations, cannot be paid from a TTR pension.

Q: How is the transition to retirement pension amount determined? By the individual or is it a percentage of the amount in the TTR?

As mentioned above, a TTR recipient can withdraw any pension amount that is greater than the minimum 4% and no more than the maximum 10% of their TTR pension balance each year.

Q: Are there any disadvantages of commencing a TTR pension?

There are a few outcomes that need to be considered before setting up a TTR pension:

• Your end retirement savings balance will be reduced if you commence a TTR
• Your super fund may require you to maintain a minimum account balance in your accumulation account for any relevant insurance cover to be maintained
• A TTR pension may adversely impact any Government income support that you or your spouse or partner may otherwise be entitled to
• TTRs can create a cash flow issue for SMSFs and will often require a change to the fund’s investment strategy and asset allocation, such as an increase in the level of cash holdings.

Q: If I retire from my work, what happens to my transition to retirement pension? Does it need to stop?

A TTR pension does not automatically cease when the recipient meets a further condition of release such as retiring or turning 65. The TTR pension continues to be paid to the recipient.

It will however mean that the TTR pension is now considered to be a retirement phase pension, resulting in:

• The TTR pension balance will be assessed against the member’s transfer balance cap
• The removal of the 10% maximum pension limit
• The removal of any lump sum payment restrictions.

It is important to check the balance of your TTR pension before you meet a further condition of release to avoid creating a transfer balance cap issue.

For SMSF members, you will also need to check your trust deed for any fund specific rule that may apply. Some SMSF trust deeds may require an existing pension to be stopped before any existing restriction around payment levels can be changed.

SMSF trustees will also need to consider any transfer balance account reporting requirements that need to be seen to when a TTR pension enters retirement phase.

Q: Are there any tax outcomes when a TTR pension commences?

Starting a TTR pension should not automatically result in a tax outcome for your super fund or for you personally as there is no tax applied to the amounts transferred from the accumulation phase to the TTR pension.

However, you should seek tax advice if you are required to sell assets in your super fund for a transfer to be made into a separate pension account or product.

Q: Can my super fund still receive super guarantee contributions when I am taking a TTR?

Yes, super fund trustees can still accept super guarantee (SG) contributions when the relevant member is already accessing their benefits, including access via a transition-to-retirement pension.

Keep in mind that all super contributions, including SG contributions, need to be made to the member’s accumulation account. They can’t be contributed to a pension account the member may have, including a TTR pension account.

Q: Can I use the contribution splitting strategy if my spouse is already accessing benefits under a transition-to-retirement pension?

There are restrictions imposed on the recipient spouse (the spouse who receives the benefits), under a contribution splitting arrangement, including:

• That the receiving spouse must be under preservation age, regardless of their work status; or
• Between their preservation age and age 65 and not yet retired.

Where someone is already accessing a TTR pension, then this indicates they would have already reached their preservation age. So based on this, the spouse would only be eligible to receive amounts under a contribution splitting arrangement if they had not yet retired.

Q: I have a transition-to-retirement pension and my employer still makes contributions to my fund. How do I add these contributions to my transition-to-retirement pension?

The super rules do not allow additional capital to be added to an existing pension, even amounts that have been received into the fund as contributions.

If a pension recipient wants to move accumulation benefits into retirement phase, then they have two options:

1. Stop the existing pension by rolling these amounts back to their accumulation account and then recommence a new, larger transition-to-retirement pension; or
2. Start a new, second transition-to-retirement pension with amounts held in accumulation. The member would then run two, or more, separate pensions in their super fund.

As always, check any fund specific requirement or the relevant SMSF trust deed.

Q: How can I determine if my SMSF allows members to access benefits through a transition-to-retirement pension?

The rules for each SMSF are set out in its trust deed. If you want to check if your fund allows TTR pensions, then you need to read your fund’s trust deed.

Your deed would usually have a section on “member benefit payments” or “pensions” where it should set out rules that are specific to transition-to-retirement pensions.

The following are examples of trust deed clauses allowing TTR pensions:

Example 1:

“The Trustee must pay transition-to-retirement pensions consistently and as defined in SIS Regulations (Regulation 6.01(2)). …..”

Example 2:

The Trustee must pay a pension benefit to a Beneficiary in the form of:

• A non-commutable account-based pension (transition to retirement)
• A defined benefit pension
• A market linked pension
• ….

Example 3:

The “XYZ Superannuation Fund” trust deed permits the trustees to pay any type of pension permissible under superannuation law.”

It would also be a good idea to check your trust deed for any fund specific rules or requirements around the establishment of a pension.

Q: Is it possible that TTR pensions will no longer be allowed in the future and result in existing pensions having to cease?

We are not aware of any existing plans by the Government, or the Opposition, to ban transition-to-retirement pensions or for any other changes to the TTR rules.

It is also worth noting that when legislative changes are proposed, there is usually a transitional period before those changes become law, to allow those affected to put in place any required change to comply with the new laws.

Q: Can I start a transition-to-retirement pension during the year, or do I need to wait until the following 1 July?

A TTR can be started at any time during the year, so long as the member has met the required condition of release, that is, “attaining preservation age”.

There is no need to wait until the start of the new financial year.

Where a TTR begins on a day other than 1 July, the minimum pension amount (4% of the pension starting balance), is prorated based on the number of days remaining in the financial year.

Q: What are the pro-rata rules for a transition-to-retirement pension?

As mentioned in the previoius question, the annual minimum pension is prorated where the pension commences on any day other than 1 July.

However, the 10% maximum that applies to transition-to-retirement pensions DOES NOT need to be prorated. Regardless of when a TTR pension commences, the member can access up to a maximum of 10% of the pension opening balance in the first year.

For example, if a member decides to start a pension on 1 May with $700,000, they would still be allowed to access up to $70,000 (10% of $700,00) in that first year.

Q: Is it still worthwhile starting a transition-to-retirement pension where the member balance is not large, for example a member balance around $500,000?

For some fund members, starting a TTR may not be an appropriate strategy. It really depends on the personal circumstances of the fund member.

It is important that super fund members consider seeking advice in situations where they are not sure what to do or where they want specific advice that relates to their personal position.

Where a member wants to supplement their income with a pension from their super fund, and they are not yet able to access their benefits any other way, then a TTR can be useful.

There may also be other reasons for a member to make use of the TTR strategies available, including a tax arbitrage strategy whereby the member makes salary-sacrificed contributions to super, and then supplements their income with tax-free pension payments from a TTR pension.

There are also other TTR strategies that could prove beneficial. Read more about currently available TTR strategies.

Q: Are the funds drawn from a TTR added to your taxable income for the FY along with other taxable income received?

This will depend on the member’s age.

Pension payments received before age 60 may be subject to tax, depending on the tax components that make up each pension payment. Keep in mind that pension payments are paid proportionately from the relevant tax components that make up the pension balance.

These tax components include:

• Tax-free component: These amounts come from your after-tax or your non-concessional contributions into your super account. Pension payments made from your tax-free component are received tax free; there is no tax payable on these amounts.
• Taxable component: These amounts come from your concessional (before-tax) contributions, including employer contributions, salary-sacrifice contributions and any personal super contributions for which you claimed a tax deduction. This component also includes all investment earnings related to your accumulation account.
  If you are under age 60, the taxable component of your pension payments is included in your assessable income and taxed at your marginal tax rate, but you receive a 15% tax offset.
  If you are 60 or older, the taxable component of your pension payments is received tax free.