For most people aged between 60 and 65, a transition to retirement pension is a no-brainer.
This article covers the pros and cons of a TTR pension,the tax on pension payments, the maximum pension allowable, as well as when a TTR pension is and isn’t a good idea.
5 Benefits of a Transition to Retirement Pension
If you have a superannuation accumulation account and have attained the delightful age of 60, you really need to consider the advantages of a transition to retirement (TTR) pension.
For many of you, a transition to retirement pension will be a very good idea.
Here’s five reasons why a TTR pension can benefit you.
1. Work Less
If you like the work you do, but don’t want to be doing it 5-days per week, then you might consider reducing to part-time work and using a transition to retirement income stream to supplement your reduced work-related earnings.After all, that was the whole purpose for the Government’s introduction of the transition to retirement pension.
And, because transition to retirement pension is tax-effective while under age 60 and tax-free from age 60, you don’t need to draw down the equivalent amount to what you would have otherwise received in employment earnings.
2. Pay Down Debt Faster
Even if you plan on continuing to work full-time, you might consider starting a transition to retirement pension to provide you with additional income that can be used to pay down any residual debt faster.
Using a TTR pension this manner can be especially beneficial if is during a high-interest rate period, because the the probability of after-tax superannuation investment earnings being greater than interest on your loan is going to be lower – particularly if your debt is non-deductible debt (i.e. home loan or credit cards).
Read More: Should I Withdraw Super to Pay Debt?
3. Pay for an Upcoming Expense
You might have found yourself in a position where you have an upcoming capital expense, such as home renovations, a trip to Tamworth or a tax bill that you need a little bit of help paying for. If this is the case, you might consider starting a TTR pension, which can give you access to up to 10% of your account balance each year – this is the maximum pension for TTR income streams.
Depending on the rules associated with your specific super fund, the 10% can be taken as a one-off lump sum withdrawal, so that you get the full amount in one payment.
4. Implement a TTR Strategy
A common use and probably the greatest benefit of a transition to retirement pension is the implementation of a transition to retirement strategy.
A TTR strategy involves salary sacrificing part of your wage into superannuation and replacing your reduced personal income with tax-free pension income. The same concept applies if you’re self-employed, but instead of salary sacrificing, you would make personal concessional (deductible) contributions.
A transition to retirement strategy can simultaneously reduce your personal income tax and increase your super balance, as explained in this video.
5. Implement a Recontribution Strategy
A lesser known benefit of a transition to retirement pension is the implementation of a recontribution strategy. A recontribution strategy can be advantageous when you are already maximising your concessional contribution cap and don’t need income from a TTR pension to supplement your income to cover expenses.
After a lifetime of work, it’s likely that your superannuation consists largely of taxable components. Taxable components incur tax of 17% if paid to a non-tax dependant (i.e. adult children) in the event of your death. However, by drawing down income from a TTR pension and contributing back into super as a non-concessional contribution, you effectively convert taxable components into tax-free components, which are received tax-free by non-dependants in the event of your death.
Learn More About: Tax On Death Payments
A recontribution strategy also protects against potential changes to superannuation rules, such as Australians over age 60 being taxed on super withdrawals once again.
In order to implement a recontribution strategy, you need to ensure you have available non-concessional contribution caps and are eligible to make such contributions.
This video helps to give you a greater understanding of how superannuation tax components are applied:
What Are the Disadvantages of a Transition to Retirement Pension?
The risks and disadvantages of a transition to retirement pension include the following:
- Reducing Retirement Savings – By accessing superannuation prior to retirement, you will be reducing the amount of retirement savings you have at retirement (if not replenished with contributions).
- Potential Income Tax – Tax may be payable on TTR pension payments if you are under age 60.
- Managing Two Accounts – If you will be continuing to work or making contributions, you will need both a TTR pension account and an accumulation account, because contributions cannot be made to a TTR pension account.
- Possibly Losing Insurances – If you transfer your total accumulation account to a TTR pension, you might unknowingly cancel life insurances that were held in your accumulation account.
- Missing Out On Tax Deductions – If you have made contributions to super that you intend on claiming a tax deduction for, you will need to ensure you have submitted an intent to claim a tax deduction form with your super fund and received confirmation from then, prior to commencing a TTR pension; otherwise you will probably be unable to claim a deduction for the contribution.
Do I Pay Tax on TTR Pension Payments?
No tax is payable on TTR pension payments if you are aged 60 or over. However, if you are under age 60, tax may be payable.
The way to determine how much tax you pay on TTR pension payments under age 60 is to first calculate the tax-free portion of the TTR pension.
Your superannuation consists of tax-free components and taxable components. While in accumulation phase, the proportion of these tax components change daily, based on contributions and investment earnings. But, once you start a TTR pension, the proportion is locked in. For example, if you had a super balance of $500,000 and $100,000 of this are tax-free components, and you used your total balance to start a TTR pension; then your TTR is said to be a 20% ($100,000/$500,000) tax-free pension.
All of your TTR pension payments must be made proportionately from each tax component. So, if you received TTR pension payments throughout the year of $20,000 while under age 60, then $20% ($4,000) of this would be received completely tax free and the remaining 80% ($16,000) would be assessed as income at your marginal tax rate (just like an employment wage). However, you also receive a 15% tax offset on the taxable portion of the payment. Therefore, in this example, a tax offset of $2,400 ($16,000 x 15%) would be applied and would reduce your tax payable.
Once you attain age 60, neither the taxable nor tax-free components of TTR pension payments are assessed for personal income tax purposes.
What is the Maximum Pension I Can Receive from a TTR Pension?
The maximum pension you can receive from a TTR pension is 10% of your account balance each financial year. The 10% is calculated on the balance of your TTR pension on the 1st of July each financial year. That is, the dollar amount will change each financial year based on your balance.
For example, if your TTR pension balance was $500,000 on the 1st of July this financial year, the maximum pension you could draw down would be $50,000 for the year. If your balance is then $480,000 at the beginning of next financial year on the 1st of July, the maximum for that financial year will be $48,000, and so on each financial year.
If you start a TTR pension part of the way through a financial year, this maximum amount is not proportionate. You are still able to withdraw 10% of your TTR pension account balance.
Is a Transition to Retirement Pension a Good Idea?
For most Australians, a transition to retirement pension is a good idea, because it allows you to implement a number of strategies that can enable you to either reduce tax, reduce debt, or reduce working hours – or a combination of all.
Generally, the only time a transition to retirement pension is not a good idea is if:
- You are already maximising both your concessional and non-concessional contributions;
- Your total superannuation balance consists purely of tax-free components and you are already maximising your concessional contributions; or
- You are under age 60 and the majority of your super balance consists of taxable components.
If none of these situations apply to you, then a transition to retirement pension can be beneficial. In saying that, your personal circumstances will dictate the strategies that are most suitable to you and personal advice is recommended.
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.
Articles You Might Also Like:
- Superannuation Industry (Supervision) Regulations 1994 2019, Legislation.gov.au, Attorney-General’s Department, <https://www.legislation.gov.au/Details/F2019C00655>.
- Superannuation Industry (Supervision) Act 1993 2023, Legislation.gov.au, Attorney-General’s Department, <https://www.legislation.gov.au/Details/C2023C00155>.
- Individual income tax rates, Ato.gov.au, <https://www.ato.gov.au/Rates/Individual-income-tax-rates/>.