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If you’re on the final stretch to retirement and would love to start winding back your working hours but don’t think you can afford it, listen up.
Ditto if you plan to keep working full time for a while longer and want to boost your super but haven’t got the ready cash to make extra contributions.
Help could be at hand in both cases in the form of a superannuation transition-to-retirement pension or income stream (TTR). This strategy can be used to either:
- Work fewer hours and use a TTR pension from your super to supplement your income
- Salary sacrifice some of your salary into super to save tax and withdraw income from your super using a TTR pension to replace some or all the lost income, even if you continue working full time.
Am I eligible?
If you’ve reached your preservation age and still working, you’re good to go. Your preservation age will be between 55 and 60, depending on your date of birth.
If you’re in a defined benefit fund, you may not be able to commence a TTR or you may only be able to use a portion of your benefit. Only about 10% of Australians are members of defined benefit funds, which tend to be public sector or older corporate funds. If this is you, talk to your fund to find out your options.
What are the advantages?
The taxation of TTR pensions has always been one of their key attractions. While they are still tax effective for many people, they lost a little of their shine after a change to the tax rules a few years back.
Even so, depending on your personal circumstances TTR pensions still have much to offer. They can help you:
- Ease into retirement by reducing your working hours without cutting your income or compromising your lifestyle
- Continue to make contributions to your super accumulation account (or have them made by your employer)
- Receive tax-free pension payments (but only if you are aged over 60 and in a taxed fund)
- Grow your super and save tax via salary sacrifice or voluntary contribution, even if you continue working full time.
When you salary sacrifice or make a voluntary concessional contribution into super, your contributions are taxed at the concessional rate of 15% up to an annual cap of $27,500. (Prior to 1 July 2021 the concessional cap was $25,000). This can be a valuable strategy for those aged over 60, on a marginal tax rate higher than 15%, and a super balance that could do with a boost.
What are the drawbacks?
The financial benefits of a TTR strategy may be marginal before you turn 60. Here are some things to keep in mind:
- If you are aged 55–59, the taxable portion of your TTR pension payments is taxed at your marginal rate less a 15% tax offset.
- The more of your super funds you withdraw during your TTR phase, the less money you’ll have available when you do retire – unless you replace your withdrawals with contributions.
- If you or your partner currently receive any social security payments, a TTR pension may affect your entitlements.
- Your fund may require you to leave a minimum amount in your accumulation account to maintain your insurance cover.
- The tax savings (and super boost) of salary sacrifice or voluntary contributions into super may not be worthwhile for low- and high-income earners, as illustrated below.
For a low-income earner on a marginal income tax rate of 19% or less, the tax savings of a TTR strategy will be negligible.
Take the example of Dave, who earns $35,000 and can afford to salary sacrifice $5,000 a year into super considering his maximum TTR withdrawal. He would only save 6% tax by doing this (the difference between his marginal rate including Medicare levy of 21% and the 15% super tax rate), or $300. He may be better off making an after-tax super contribution of $1,000, for which he would receive the maximum government co-contribution of $500.
For high-income earners, there may be limited scope to make additional concessional contributions.
Take the example of Rajiv, who earns $180,000 and receives Super Guarantee payments of $19,800 a year, just $7,700 short of the annual $27,500 concessional cap. He has enough ready cash to make a tax-deductible contribution of that amount without having to bother with a TTR pension.
How do I get started?
You start a TTR pension by transferring some of your super from your accumulation account into a pension account.
The transferred funds don’t count towards your transfer balance cap because you’re still working and therefore not in retirement phase. But the funds in your TTR pension account will count towards your transfer balance cap once you do retire. This cap is currently $1.9 million.
You must leave at least a small balance in your accumulation account so that it remains open to receive your employer’s compulsory super guarantee contributions or any voluntary contributions you may want to make.
Investment earnings in both your accumulation and pension accounts are taxed at 15%.
You must withdraw a minimum of 4% of your TTR pension account balance each year (if you’re aged under 65) up to a maximum of 10%. At least one withdrawal must be made each year.
Once you’re over 65 there are different minimum pension payments rates.
If you’re aged 65 and over, there are no restrictions on the amount of super you can withdraw even if you’re still working. Rather than set up a TTR pension you can start a normal super pension, which has added benefits (outlined below).
How do I stop a TTR pension?
A TTR pension automatically converts to a retirement phase pension when you meet a superannuation condition of release, such as retiring or reaching age 65.
When your TTR pension becomes a retirement phase pension, you’ll be entitled to tax-free investment earnings and no upper limit to withdrawals.
You can also transfer your pension account funds back into your accumulation account at any time. You must have made at least the pro-rated minimum withdrawal before you stop your TTR pension. For example, if you stop the pension exactly halfway through the financial year, you must have received 50% of that year’s minimum payment before stopping the pension.
Can I start a TTR from my self-managed super fund (SMSF)?
The short answer is yes, provided this is allowed in your SMSF’s trust deed.
If you’re a trustee and want to start a TTR for yourself or another member of your fund, you should get independent professional advice. The rules are complex and not complying can be costly.
Look (for advice) before you leap
Transition-to-retirement pensions have real benefits for some people but may be less attractive for others. Deciding whether a TTR strategy is appropriate for you is an important decision and will depend on your personal financial circumstances and goals. As the information in this article is general in nature, and the calculations around TTR pensions can be complex, we suggest you seek independent financial advice before you act.