If you’re aged 60 or over, you really need to understand the benefits of starting a transition to retirement pension. It’s, dead-set, the best invention since the camcorder. And, I’m going to show you three reasons why you should consider starting one right now.
The reason for the introduction of the transition to retirement pension was to encourage Australians to successfully transition into retirement. This is achieved by allowing you to reduce your working hours in the lead-up to retirement and supplement reduced work-related income with superannuation income payments via a TTR Pension.
By providing you with limited access to your super from a certain age, the intention is that you will work for longer, albeit at a reduced capacity.
But there are other reasons why you might consider starting a TTR Pension, apart from just supplementing your reduced work-related earnings. Let’s check out some of the other reasons.
3 (Other) Reasons To Start a Transition To Retirement Pension
A transition to retirement pension is an income stream you can start with your superannuation balance once you have attained your superannuation preservation age, even if you are still working.
Once you commence a transition to retirement (TTR) pension, you are able to receive an income of between 4% and 10% of your account balance each financial year and, being over age 60, the income is received tax-free. This opens up a number of strategic and tax-effective strategies; however, there are a number of things to be mindful of before going down this track.
Without further adieu, here are what I believe to be the best 3 reasons to start a TTR pension, apart from simply allowing you to reduce your working hours.
1. Implement a Transition to Retirement Strategy
Starting a transition to retirement pension allows you to implement a transition to retirement strategy. A TTR strategy is a tax minimisation strategy whereby you replace taxable income with tax-free income.
A TTR strategy works by making salary sacrifice or deductible contributions into superannuation and then receiving tax-free TTR pension payments to cover the loss of income that resulted from the super contributions.
To optimise your TTR Pension strategy, you need to first understand your salary sacrifice limits. This video shows you how you can calculate your salary sacrifice limits.
For example, let’s say you earn $80,000 p.a. You might consider salary sacrificing $15,000 of this into super (to avoid paying income tax on the $15,000) and then withdraw $15,000 tax-free from a TTR pension, so that there is no loss in income.
This strategy alone will reduce tax by $2,950 each year, even after accounting for contributions tax. The tax benefits can be significantly larger if you earn more, or have a super balance of less than $500,000.
As you can see, a very simple strategy that can be quite tax-effective. However, it is imperative that the TTR pension and salary sacrifice (or deductible contribution) arrangement is established correctly to benefit from such a strategy.
2. Pay Off Debt
As you now know, by starting a transition to retirement pension once you have attained your superannuation preservation age, you have tax-free access to your super. But why would you want to access your super if you are still working full-time and do not need additional income to cover your lifestyle expenses?
Well, even if you are continuing to work full-time past your preservation age, you might still have an outstanding mortgage or other debt that you are paying off. By accessing your super via a TTR Pension, you will have even more income, which can be used to pay off your debt faster.
Related Article: Should I Withdraw Super to Pay Down Debt?
The downside of this strategy is that you will obviously be reducing your super balance before retirement and, if your after-tax super earnings were greater than the loan interest otherwise saved by paying down debt, it may have been better to not pay off debt and to have simply left your super invested. Either way, that’s for you to decide – but using TTR Pension to pay down debt can still be a beneficial strategy.
3. Recontribution Strategy
Setting up a transition to retirement pension can be part of a recontribution strategy. A recontribution strategy is the act of converting taxable superannuation components into tax-free components.
Your super balance, right now, consists of either taxable or tax-free components or, more likely, a combination of both. Ideally, you want your super balance to have more tax-free components than taxable components.
Tax-free components come about when after-tax super contributions are made into your account. Taxable components come about when deductible contributions are made into your account, as well as through investment earnings.
Tax components determine the amount of tax you pay on super withdrawals under age 60 and the tax your beneficiaries pay on receipt of your super balance when you eventually pass away. In fact, taxable components were once also relevant for super withdrawals for people aged 60 and over – which could become relevant again in the future.
Now, to the point! By starting a TTR Pension over age 60, the tax-free income received could be immediately contributed back into super as a non-concessional contribution, which effectively converts taxable super components into tax-free components. This will reduce potential death benefits tax and protect against possible changes to super legislation relating to the taxation of super withdrawals for people over 60.
One consideration with a recontribution strategy is that the amount contributed back into super as a non-concessional contribution will count towards the non-concessional contribution cap.
How To Start a Transition to Retirement Pension
To start a transition to retirement pension, you need to contact your financial adviser, find the application form on your super fund’s website or phone your super fund and ask for instructions.
Most superannuation funds will offer you the ability to set up a transition to retirement pension. The process of starting a transition to retirement pension may be by way of a paper-based form or online application. If you have a self-managed superannuation fund (SMSF), you should contact your financial adviser or accountant.
Risks of Starting a Transition to Retirement Pension
Some risks and things to consider when starting a TTR Pension include:
Previous Deductible Contributions
If you have made personal concessional contributions to super, but have not yet notified your super fund of your intention to claim a tax deduction for such contributions and received subsequent acknowledgement from them, then starting a TTR Pension before doing so is likely to result in your inability to claim a personal tax deduction for the contributions. This could result in thousands in additional income tax.
Starting a TTR Pension usually means that you will be continuing to work, or will be returning to work at some point. Therefore, you want to ensure that you have a super accumulation account open to accept future employer contributions and personal contributions, because contributions cannot be made to a TTR Pension account. This might mean starting your TTR Pension with 90% of your balance, for example, and leaving 10% in the accumulation account, so that it remains open.
If you start a TTR pension with your total super accumulation balance and effectively close down your accumulation account, any insurance that you had within that accumulation account will be cancelled and you will no longer be covered. It can be difficult to reapply for cover once cancelled, especially if you have had health issues. Therefore, you may consider leaving an adequate balance within the accumulation account, so that premiums can continue to be funded and the account can remain open.
There are a number of benefits to starting a TTR Pension. However, it is highly recommended that you obtain personal advice from a financial adviser prior to commencing one. Incorrect implementation of a TTR pension and failure to consider all the risks could result in costly mistakes. It’s very easy to get something wrong and, once you do, there’s no going back.
Our financial planning firm, Toro Wealth, specialises solely in helping 50 to 70 year-olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.
Frequently Asked Questions
Here are some common questions asked in relation to starting a transition to retirement pension.
How Does a Transition to Retirement Pension Work?
A transition to retirement pension works by using your super accumulation savings to start a transition to retirement pension. Once a transition to retirement pension has commenced, you are required to draw an income of between 4% and 10% of your account balance.
No contributions are allowed to be made to a TTR Pension. If you no longer need the TTR Pension income, you can simply transfer the TTR Pension back into an accumulation account, or implement one of the strategies above.
What Age Can You Start a Transition to Retirement Pension?
You can start a transition to retirement pension once you attain your superannuation preservation age. You can start a transition to retirement pension even if you are still working full-time.
If you are born on or after 1 July 1964, your preservation age is 60. Your preservation age reduces by one year for each financial year that you are born prior to 1 July 1964. If you were born prior to 1 July 1960, your preservation age is 55, as shown in the table below:
|Date of Birth||Preservation Age|
|Before 1 July 1960||55|
|1 July 1960 – 30 June 1961||56|
|1 July 1961 – 30 June 1962||57|
|1 July 1962 – 30 June 1963||58|
|1 July 1963 – 30 June 1964||59|
|After 30 June 1964||60|
Who is Eligible for Transition to Retirement Pension?
You are eligible for a transition to retirement pension if you have reached your superannuation preservation age and have a superannuation accumulation account. Your employment status is irrelevant when determining your transition to retirement pension eligibility.
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