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Transition-to-retirement (TTR) pensions used to be referred to as the Magic Pudding because like Norman Lindsay’s famous cut-and-come-again pud you could have your cake and eat it too.
The pudding may be a bit smaller since the government tightened the tax rules back in 2017, but a TTR pension is still appetising for some. For others, the dish has lost its appeal.
TTR pensions were originally designed by the Howard Government to allow people to reduce working hours in the lead-up to retirement and replace all or some of the pay they lost by drawing an income stream from their superannuation.
That was the idea, but it wasn’t long before they were being used as a tax dodge. People over 60 could draw a tax-free pension from age 60 while still working full time and salary sacrifice back into super, growing their super and consuming it at the same time. Hence the Magic Pudding analogy.
Note: Transition to retirement pensions are also sometimes abbreviated as TRIS (transition to retirement income streams), particularly by the ATO.
So what’s changed?
From 1 July 2017, the investment returns on the assets underlying a TTR pension are taxed at 15% just as they are in a super accumulation account; previously they were tax-free. However, these earnings are still exempt if you are over 65.
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What has not changed is the taxation of TTR pension income. If you are 60 or older, in most cases your pension payments will be tax-free. If you are younger than 60, then the taxable portion of your pension income will be taxed at your marginal tax rate, less a 15% tax offset.
How do they work again?
You start a TTR pension by transferring part of your super into a pension account once you reach preservation age, currently 55-60, although they work best once you turn 60 and can receive the income tax-free.
You can withdraw a maximum of 10% of your pension account balance each financial year, with no lump sum withdrawals permitted. If you change your mind or go back to full-time work you can roll the balance back into your super accumulation account at any time.
The amount you transfer will depend on how much income you want. You will need to leave enough in your accumulation account, so it’s remains open and able to receive ongoing employer or personal contributions and pay any insurance premiums.
How is that different to a regular super pension?
For starters, once you reach preservation age and retire you can withdraw your super as a lump sum or an income stream. Unlike a TTR pension, all income and earnings on pension assets (including capital gains) are tax-exempt from age 60. If you are under 60 some tax may be payable.
There are no limits on lump sum withdrawals, but there are limits on the amount of income you can receive each year from a super pension. Minimum pension payments (calculated on July 1 each year) are set as a percentage of your account balance, starting at 4% if you are under 65 and rising on a sliding scale to 14% once you turn 95.
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Does a TTR strategy still make sense?
A TTR strategy still has benefits, but mostly for those 60 and older on middle incomes with low to mid-level super balances. The tax savings may be a little less generous, but they are still there to be had.
Let’s look at an example.
Let’s look at another example.
Transition to retirement may still be a worthwhile option, depending on your personal circumstances and whether you are looking to reduce your working hours, save tax or boost your super. The numbers can be complex so talk it over with your super fund or financial adviser.
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