In 2005, the Howard government introduced legislation allowing older Australians to access part of their superannuation savings without the need to retire.
These changes formed part of the government’s overall policy to keep older Australians in the workforce for longer, in a bid to address issues with an ageing population and a labour and skills shortage.
The government’s intention at the time was to allow these older workers to reduce the hours they spent at work while allowing them to supplement their reduced employment income with their retirement savings.
This was achieved with the introduction of transition-to-retirement (TTR) pensions. If you are eligible, these pensions allow you to access up to 10% of your TTR pension account balance each year even if you maintain gainful employment.
Prior to these changes, most individuals would need to retire to access their super.
Some 18 years later, these pensions are still being used by many Australians and, where used appropriately, can provide some unique opportunities.
Transition-to-retirement strategies to consider
Depending on your circumstances, a TTR pension may create an opportunity to improve your work-life balance and/or your potential retirement income.
Some of these strategies or opportunities include:
Reduction to work hours
Starting a TTR could allow you to reduce the hours spent in paid employment and supplement this reduced employment income with a pension from your super fund.
This was the initial policy intention of the government when these rules were introduced.
Increase cash flow to meet the rise in the cost of living
We are all aware of the huge increase in the cost of living over the last few years. Grocery bills are significantly higher and utility costs have sky rocketed.
Where eligible, using a TTR pension to provide extra income and reduce financial stress could be a solution worth considering.
You could use the pension payments from a TTR pension to reduce outstanding debts, like mortgages, personal loans or credit cards.
Reducing these debts would usually reduce the overall interest expense, and in many cases would reduce the term of these loans. Once these debts have then been paid off, the amounts that were being used to meet these repayments could be redirected back into super, where appropriate.
Utilise a recontribution strategy earlier
It is important to keep in mind that if you are over 60, payments you receive from a taxed superfund, including TTR pension payments, are usually paid to you tax free.
A recontribution strategy works by withdrawing part of your super, proportionately from both your taxable and tax-free components, and then recontributing these amounts back into the super system.
This recontributed amount is usually put back into your super fund as a non-concessional contribution, which forms part of your tax-free component.
Amounts that make up your tax-free component are not subject to tax on your death, even where your super benefits are paid to non-dependents, including your adult children.
The recontribution strategy essentially reduces any ‘death tax’ that may otherwise be payable by non-dependents.
This can be an effective estate planning and tax strategy as it replaces amounts that would otherwise be subject to tax with tax-free benefits.
Commencing this recontribution process at a younger age, after reaching your preservation age, by way of payments from a TTR pension, could be worth considering.
Equalising spouse super balances
You could consider starting a TTR pension from your own super account and then use these amounts to contribute back into your spouse’s super fund. This is an effective way to ‘even out’ member balances.
As there is a limit imposed on the balances an individual can hold in the tax-free retirement phase of super, it would usually be beneficial for both spouses to hold balances that are within this limit, rather than one spouse being above the cap and one below.
This limit on retirement phase balances is referred to as the transfer balance cap.
You could also consider using a TTR pension to help keep both spouses under the proposed new $3 million ‘soft cap’ rules; whereby super fund earnings on balances above this cap will be subject to higher rates of tax.
Pension payments received by one spouse could then be contributed to the other spouse’s super account where the contribution rules are met. Again, with the aim to maintain relatively equal balances.
This $3 million soft cap is part of the government’s proposed 1 July 2025 tax changes.
Access the carry-forward concessional contribution rules for members with balances below $500,000 at the previous 30 June
Where a member balance is likely to be above this limit, you could consider starting a TTR pension and withdrawing pension payments to reduce your 30 June balance, and therefore allow you to contribute any unused concessional cap amounts from previous years.
Most of these strategies only work once access to super is allowed. You could of course wait until age 65 or for another event to occur that allows access, but by using a TTR pension you may be able to utilise these strategies at an earlier age or for a longer period. This is certainly something to consider.
It would also be important to consider how accessing benefits at an earlier age will affect your overall super balance when you finally retire.
The information contained in this article is general in nature. Your personal position has not been taken into consideration. You should seek personal advice before taking any action.