Guide to transition to retirement pensions (TTRs or TRISs)

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.

You must also be a member of an accumulation fund, not a defined benefit fund. Only about 10% of Australians are members of defined benefit funds and tend to be members of public sector or older corporate funds.

What are the advantages?

The taxation of TTR pensions has always been one of their key attractions. They are still tax-effective for many people, although they lost a little of their shine after a change to the tax rules a few years back.

Note: From 1 July 2017, the investments underlying a TTR pension are taxed at up to 15% just as they are in a super accumulation account – previously they were tax-free. To learn more, see SuperGuide article Did tax kill the transition to retirement magic pudding?

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).
• 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 $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.

Give me an example

Jill is 58 and earns $100,000 a year which puts her in the 39% tax bracket (including the Medicare Levy). She has $200,000 in super and wants to keep working full-time but wishes she could do more to increase her retirement savings. As she doesn’t have the spare cash to make extra contributions, she decides to take advantage of a TTR strategy.

Her employer currently pays Super Guarantee contributions of $9,500, allowing her to salary sacrifice $15,500 into super and stay within the concessional (pre-tax) super contributions cap of $25,000 a year. This reduces her income tax (concessional contributions are taxed at 15% rather than her marginal tax rate of 39%), but it also reduces her take-home pay.

To make up the difference, Jill transfers $200,000 into a TTR pension. Under the rules, she must withdraw between 4% ($8,000) and 10% ($20,000) a year. To maintain her current level of take-home pay, she withdraws around $12,500 a year.

As Jill is not yet 60, she pays tax on her TTR pension but receives a rebate of 15%. The bottom line is an overall tax saving of $800 a year which will increase her super by the same amount. Admittedly, this is not a life-changing amount. However, when Jill turns 60 and her TTR pension is tax-free, her tax savings (and super boost) will be over $3,600 a year.

Disclaimer. These are ballpark figures. Everyone’s TTR calculation will be different, depending on their age, income, super balance, marginal tax rate and investment returns from super. We have assumed an investment return of 7% a year.

What are the drawbacks?

As the example above shows, 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 between 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.
• If you or your partner currently receive any social security payments, a TTR pension my 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. He would only save 4% tax by doing this (the difference between his marginal rate of 19% and the 15% super tax rate), or $200. He may be better off combining salary sacrifice (without a TTR strategy) with an after-tax super contribution of $1,000, for which he would receive the maximum government co-contribution of $500.

For more on the co-contribution and other ways to add to your super, see SuperGuide’s What contributions are best for me?

For high-income earners, there may be limited scope to make additional concessional contributions.

Take the example of Paul, who earns $180,000 and receives Super Guarantee payments of $17,100 a year, just $7,900 shore of the $25,000 cap. He has enough ready cash to make a tax-deductible contribution of $7,900 a year 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. Most super funds offer a pension account, but it your fund doesn’t you can start a TTR pension with another fund.

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 $1.6 million.

You must leave at least a small balance in your accumulation account so that it remains open to receive your employer’s compulsory 9.5% 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 pension account balance each year (if you’re aged under 65) and a maximum of 10%. At least one withdrawal must be made each year.

Once you’re over 65 there are different minimum pension payments. See SuperGuide article Guide to minimum pension payment rules (including calculator) for more information.

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 an account-based pension when you meet a superannuation condition of release, such as retiring or reaching age 65.

When your TTR pension becomes an account-based 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. If you are under 65, you must have made the minimum 4% withdrawal in the financial year you stop your TTR 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.

Before you set up a TTR pension, it’s important to establish the mix of assets you (or your fund members) have in your SMSF. This could include a mix of:

• Unrestricted non-preserved benefits (which can be accessed without meeting a superannuation condition of release),
• restricted non-preserved benefits, and
• preserved benefits.

All three of these asset categories can be transferred to support a TTR pension, but they must be chosen in the order outlined above. The tax-free and taxable components of any assets used must also be identified so that appropriate tax payments can be made.

It’s important to understand that if assets supporting a TTR pension have both taxable and non-taxable components, you (or your fellow member) can’t choose to apply one or the other to the pension. The components must be applied proportionally.

For example, if an asset supporting the TTR pension has a taxable component of 70% and a tax-free component of 30%, these proportions must be applied for tax calculation purposes when the asset is transferred to the pension.

What else do SMSFs need to know?

Record-keeping is crucial if you’re paying a TTR pension from your SMSF. You need to keep records that show:

• The value of the TTR pension account when it commences, on July 1 each year, and when it enters retirement phase.
• All TTR pension payments made (and how they were made).
• The adjusted values of the assets supporting the TTR pension after payments have been made.
• The date you (or your fellow fund member) retire. This is when your TTR pension enters retirement phase and is subject to ‘normal’ account-based pension treatment.
• The share of your fund’s earnings that are allocated to the TTR pension (and therefore taxable at 15%).

In addition, it’s important to ensure that:

• Any fund contributions you (or a fund member) receive from your employer are kept separate from the super benefit supporting the TTR pension.
• You pay the minimum 4% annual TTR pension amount and don’t exceed the 10% maximum.
• You pay 15% tax on earnings from the assets supporting the TTR pension. You (or the member receiving the pension) will be entitled to offset this amount in your tax return.

Failure to do any of these things can mean your fund becomes non-compliant, and you know what that means. The Australian Taxation Office can impose a range of penalties on SMSF trustees for non-compliance.

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, we suggest you seek independent financial advice before you act.

Learn more about preparing for retirement in the following SuperGuide articles: