The transition to retirement rules provide several benefits and opportunities, but it’s important to understand how it all works before diving in.
Let’s take a look at how the transition to retirement super rules can work for you.
Transition to Retirement Rules
Once you reach a certain age, you are eligible to use your superannuation to start a transition to retirement (TTR) pension. Once commenced, a TTR pension allows you to receive an income from your superannuation. This income can be used to supplement other sources of income or implement tax-effective strategies.
Previously, you would need to have fully retired in order to access your superannuation. The creation of the TTR pension rules was designed to encourage you to transition to retirement by way of reducing to part-time or casual work, with the assumption that you would be more inclined to work longer. By doing so, there would presumably be less strain on social security in your later retirement years, as you wouldn’t have used up all of your super by retiring sooner.
What Age Can You Start a TTR Pension?
The earliest you can start a transition to retirement income stream is once you reach your superannuation preservation age. As soon as you reach your preservation age, you are eligible to commence a TTR pension.
Your preservation age is determined by the month and year that you were born, as detailed in the following table:
|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|
You do not need to change your working hours in order to start a transition to retirement pension. You can be working full-time, part-time, casual or not at all.
TTR Pension Minimum and Maximum Withdrawal
Once you have used some or all of your superannuation accumulation balance to commence a TTR pension, you are required to receive an income of between a minimum and maximum threshold each financial year.
The minimum and maximum TTR pension withdrawal thresholds are equal to 4% and 10% of your account balance each financial year. Specifically, you must receive an income of at least 4% of your 1 July TTR pension account balance each financial year, but no more than 10% of your 1 July TTR pension balance – both rounded to the nearest $10.
If you start a TTR pension part-way through a financial year the minimum pension income is based on a pro-rata amount, based on the number of days remaining in the financial year as a proportion of the total number of days in the year. It is then recalculated on each subsequent 1 July. The maximum amount of 10% is not pro-rata, even if the pension is commenced part-way through the year.
How Much Tax Do I Pay on a Transition to Retirement Pension?
There are two different types of taxes paid in relation to transition to retirement pensions – earnings tax and tax on pension payments. Understanding these tax rates and how the taxes are applied can help you better plan your transition to retirement.
TTR Pension Earnings Tax
When you transfer your super accumulation balance into a TTR pension, your TTR pension balance remains invested in some form or another – depending on the investment options chosen and your investment strategy.
Your invested portfolio balance will produce investment returns in the form of capital growth (increase in value of investments) and/or income (interest, dividends, distributions, rent, etc). All investment earnings remain within your TTR pension account.
All income generated from your TTR pension portfolio is taxed at a flat rate of 15% – regardless of your balance.
All realised capital gains (profits) from the sale of an investment within your TTR pension account will also be taxed at 15% in the year that the investment was sold – referred to as capital gains tax (CGT). However, if the asset sold was owned for longer than 12 months, a 1/3rd CGT discount is received, meaning CGT is effectively reduced from 15% to 10%.
No CGT is payable on unrealised capital gains.
Read more here: Tax on Super Earnings
TTR Pension Payments Tax
Tax on pension payments is different from earnings tax. Pension payments are the amount you receive from your TTR pension into your personal bank account between the minimum and maximum thresholds of 4% and 10% of your balance each year.
If you are aged 60 or over, TTR pension payments are received completely tax free. No income tax is payable on this amount.
If you are aged between your superannuation preservation age and below age 60, the taxable component portion of the pension payment amount is assessed at your individual tax rate – together with all other sources of taxable income. However, you do receive a tax offset equal to 15% of the taxable portion of the payment. The tax-free portion of the payment will be received completely tax free.
The taxable and tax-free portions of each pension payment is based on the taxable and tax-free ratio of your TTR pension balance. All pension payments must be withdrawn proportionately from each component. You can contact your super fund to find out the taxable component (element) ratios of your balance.
Can I Take a Lump Sum from a TTR Pension?
One of the limitations of transition to retirement pensions is that you are unable to take a lump sum payment from the pension. Only pension payments can be received. However, you are able to commute or roll a TTR pension back to an accumulation account.
Depending on the rules and processes of your super fund, the frequency of your TTR pension payments could be fortnightly, monthly, quarterly, twice-yearly or simply one pension payment per year.
If you have a self managed superannuation fund (SMSF), pension payments can be ad-hoc and irregular, provided they meet the minimum and maximum pension standards each financial year.
Can Contributions Be Made to TTR Pension accounts?
No, superannuation contributions cannot be made to TTR pension accounts (or any pension accounts for that matter). If you plan on continuing to make contributions to super after starting a pension, you will need to have a separate superannuation accumulation account. This can be achieved by leaving a small balance in your accumulation account when starting a pension, or by opening up a new accumulation account.
Transition to Retirement Example
If you were to start a transition to retirement pension with $500,000 on 1 July of a financial year, the minimum and maximum pension income requirements for the year would be equal to $20,000 (4%) and $50,000 (10%). You would need to withdraw an income between these amounts.
If on 1 July the following year, your balance had reduced to $472,300 after all pension payments and earnings from the previous year, your minimum and maximum income thresholds would be recalculated as $18,890 (4% rounded to the nearest $10) and $47,230 (10%) for that year and the calculation repeated again the next year, and so on.
If instead, you originally commenced the $500,000 pension on 1 March of the financial year with $500,000, your minimum and maximum income thresholds would be calculated as $6,630 (4% x 121/365) and $50,000 (10%).
If the tax components of your $500,000 TTR pension balance was $100,000 (20%) tax free and $400,000 (80%) taxable component, then each pension payment would be 80% assessable for tax purposes with a 15% tax offset. For example, if total pension payments received for a year was $30,000; then $6,000 would be received tax free and $24,000 would be added together with all other sources of personal taxable income and taxed at your marginal tax rate. However, a tax offset of $3,600 ($24,000 x 15%) would be received.
As you can see, there is a lot to consider with the transition to retirement pension rules, but you can also benefit greatly from using the TTR pension rules to your advantage as you transition into retirement, providing you with more savings for retirement and allowing you to retire sooner. If you would like personal advice in this matter, please consider our advice team. Click here to learn more.
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