Transition to Retirement Income Stream: Your Complete Guide

The transition to retirement income stream is the key component of most transition to retirement strategies.

It provides strategic, tax and cash flow benefits that can help you seamlessly transition into retirement, rather than having an abrupt halt to your working life.

Retirement can be an emotional time, so transitioning into retirement can make the process smoother, easier to get used to and give you a better idea of what’s involved.

Here’s how a transition to retirement income stream can help.

Transition to Retirement Income Stream

A transition to retirement (TTR) income stream is started by using your superannuation balance to provide you with an income stream. It is specifically intended to allow you to reduce your working hours so that you can work for longer without the pressure of working full-time. The subsequent reduction in income as a result of working fewer hours is supplemented by income drawdown from a transition to retirement pension.

While it was initially intended to be used for a reduction of working hours to keep you working for longer, it is arguably more commonly used for the implementation of a transition to retirement strategy.

Related article: Best Retirement Income Streams

What Age Can I Start a Transition to Retirement Income Stream?

You are able to commence a TTR income stream once you have reached your superannuation preservation age. Your preservation age is determined by when you were born, as shown in the table, below:

Once you have attained your preservation age, you can use some or all of your super balance to start a TTR income stream by transferring it into a transition to retirement account, which is separate from your standard accumulation account.

If you have a self managed superannuation fund (SMSF), you simply complete the appropriate minutes and documentation required to signify that a TTR income stream has commenced, including the date of commencement, which member it applies to and the purchase price, etc.

Related article: How To Start Transition To Retirement

This video shows you how a TTR Pension works:

Is a Transition to Retirement Income Stream Taxable?

There are two types of taxes that apply to TTR income streams: TTR income stream payments and TTR income stream investment earnings. Both of these types of taxes have been addressed, below.

TTR income stream payments

If you are aged 60 or over, all pension payments received from a TTR income stream are received tax free.

If you are aged between your preservation age and under 60, the taxable element portion of each pension payment will be taxed at your personal marginal tax rate, minus a 15% tax offset. The tax-free element portion of each pension payment will be received tax free.

All pension payments must be withdrawn proportionately from each element. You can contact your super fund to find out the tax elements that make up your super or TTR income stream balance.

TTR income stream earnings

Your TTR income stream balance will be invested in some form or another. The investment earnings are taxed in the same manner as the tax applied to earnings within a superannuation accumulation account. Specifically, all income (interest, distributions, dividends, rents, etc.) is taxed at a flat rate of 15%. All realised capital gains (profits resulting from the sale of an investment) are also taxed at 15%. However, a 1/3rd capital gains tax (CGT) discount is applied if the investment that was sold within your TTR account was owned for longer than 12 months. This means that you effectively only pay 10% CGT on investments owned for longer than 12 months.

Transition to Retirement Income Stream Maximum and Minimum

When you start a TTR income stream, you are required to draw an income equal between a minimum and maximum threshold. The minimum and maximum income thresholds are equal to 4% and 10% of your account balance each financial year. This means that you need to nominate an income amount of between 4% and 10% of your 1 July account balance each year – no more, no less; rounded to the nearest $10.

If you start your TTR income stream part-way through the year, then the minimum amount is pro-rata based on the number of years remaining in the financial year, divided by the total number of days in the year. The 10% maximum amount applies, regardless of when the income stream commences.

Transition to Retirement Income Stream Example

If you were to start a TTR pension on 1 July this year with $450,000 (10% tax-free element and 90% taxable element), your minimum and maximum thresholds would be $18,000 (min) and $45,000 (max). Therefore you would need to ensure that the income you receive from this pension over the course of the financial year is some between these two amounts, inclusive.

For the purposes of this example, let’s assume that you nominate to receive an income of $24,000 for the year.

If you are aged 60 or over, the total pension payment of $24,000 will be received tax-free. If you are under age 60, $2,400 (10%) of the total pension payments received will be completely tax-free, and $21,600 (90%) will be taxed, together with all of your other sources of personal income, at your marginal tax rate. However, a tax offset of $3,240 (15% of taxable element) will reduce tax payable.

If, instead of starting your TTR income stream on 1 July, you started it on, say, 15 September, your minimum and maximum income thresholds would be calculated as:

Minimum: ($450,000 x 4%) * (288 days / 365 days) = $14,202 (rounded to $14,200)

Maximum: $450,000 x 10% = $45,000

Transition to Retirement Income Stream Disadvantages

There are a number of disadvantages, considerations and risks associated with transition to retirement income streams.

Income Thresholds

You are only able to receive income between the minimum and maximum income thresholds, as calculated by 4% and 10% of your account balance each year. This upper-threshold limits the amount you can receive – compared to an ordinary account based pension, which has no upper limit.

Tax on Earnings

Unlike an ordinary account based pension which applies 0% tax on all income and capital gains, a TTR income stream applies a tax of 15%, with only 10% CGT applied if the investment was owned for longer than 12 months.

Learn more: Tax on TTR Pensions

Accumulation Account Considerations

If you use your total accumulation account to start a TTR income stream, you could lose any insurances that were held within your accumulation account, as they do not transfer across to your TTR income stream account. You might consider leaving a balance in your accumulation account so that the insurances remain in place and the premiums can continue to be paid.

Also, if you have made a personal concessional contribution to your accumulation account, you need to ensure you have notified your super fund of your intention to claim a tax deduction and received confirmation from them acknowledging your intentions. This should all occur prior to starting a TTR pension.

Cannot Make Contributions to TTR Income Stream

You are unable to make contributions to a TTR income stream account. Super contributions can only be made into an accumulation account. Therefore, you might consider leaving a balance in your accumulation account so that contributions can continue to be made to the account.

A transition to retirement income stream can be a very beneficial strategy; especially if you intend on utilising it to implement a transition to retirement strategy.

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.

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