There are a number of transition to retirement strategies that can be implemented by using your super to start a transition to retirement pension.
This article explores ways you can use transition to retirement strategies to minimise tax, reduce working hours, pay-off residual debt, cover upcoming expenses, or all of the above.
Transition to Retirement Strategies
Transition to retirement strategies enable you to better prepare for retirement and give you more options as to when you choose to retire. They can also significantly reduce your tax and increase your super.
The most popular of the transition to retirement strategies is simply referred to as a transition to retirement strategy. So, we’ll begin with this one!
What is a Transition to Retirement Strategy?
A transition to retirement strategy is the process of making salary sacrifice or personal deductible contributions to super and then replacing your reduced income with tax-free income from superannuation.
The benefit of a transition to retirement strategy is that you are effectively lowering your taxable income and replacing it with tax-free income, in order to pay less personal income tax.
Salary sacrifice and personal deductible super contributions do incur contributions tax; however, provided the contributions tax is lower than your marginal tax rate after making the contributions, then a transition to retirement strategy is financially beneficial.
To implement a transition to retirement strategy, a transition to retirement pension (TTR pension) is commenced with your superannuation.
What is a Transition to Retirement Pension?
A transition to retirement pension is an account-based income stream that you are able to commence once you reach your superannuation preservation age.
The transition to retirement pension rules allow you to receive an income of between 4% and 10% of your account balance each financial year.
TTR pension income is tax free if you are aged 60 or over. Tax is usually payable on TTR pension income while under age 60 and therefore often eliminates the benefits of a TTR strategy under age 60 .
Watch this video to get a better understanding of what a TTR pension is and how it works:
Transition to Retirement Strategy Example
Julie is 60 years of age and works full-time earning $80,000 per year. Julie has a super balance of $410,000. She uses $400,000 of her balance to start a transition to retirement pension, leaving $10,000 in her super accumulation account, so that the account remains open to accept future contributions and ensure insurances within super remain in place.
Julie receives employer contributions of $8,800 (11%) in the 2023/24 year. Therefore, she decides to salary sacrifice $18,700, so as not to exceed the general concessional contribution cap of $27,500. By salary sacrificing $18,700, Julie reduces her personal income tax for the year from $18,067 down to $11,535 – a saving of $6,532. However, contributions tax of $2,805 (15% x $18,700) is deducted from her contribution amount, resulting in an overall net tax benefit of $3,727.
If Julie had any carry-forward unused cap amounts, she could add that to the amount salary-sacrificed to provide an even larger benefit.
Due to Julie salary sacrificing $18,700 into superannuation, she now has less income to cover her everyday expenses. Therefore, Julie withdraws the minimum required pension payment (4%) $16,000 from her TTR pension. This strategy provide Julie with an additional $3,832 in personal net income.
Glenn is a self-employed consultant earning $140,000 per year. Glenn does not have an employer and therefore does not receive any employer super contributions. He had a super balance of $460,000 on 30 June 2023 and carry-forward unused amounts of $22,500. The current balance of his super is $510,000.
Glenn has $55,000 in personal bank savings. He uses $50,000 of this to make a personal concessional contribution to super, using the general cap of $27,500, plus his carry-forward amounts of $22,500. This brings his taxable income from $140,000 down to $90,000 and reduces his tax from $39,667 down to $21,517 – a personal income tax saving of $18,150. However, contributions tax of $7,500 will be deducted from his contribution, leaving an overall net tax benefit of $10,650.
Glenn then commences a TTR pension with $500,000 of his super, leaving $10,000 in his accumulation account, so that the account remains open and his premiums can continue to be funded. Glenn nominates to receive the maximum allowable pension income of $50,000 (10%) as a once-off pension payment to replenish his personal bank account.
Transition to Retirement Strategy Pros
The benefits of a transition to retirement strategy include:
- Tax free pension income over 60
- Increased super
- Reduction in overall tax
Transition to Retirement Strategy Cons
The disadvantages of a transition to retirement strategy include:
- Initial setup
- Two super accounts, instead of one
- Increased administration
- Accessing super prior to retirement (albeit replenishing the balance with contributions)
Other Transition to Retirement Strategies
- Reduce work hours – starting a transition to retirement pension can provide you with supplementary income if you decide to reduce working hours as you transition into retirement.
- Pay-off debt – even if you are continuing to work full-time, you may consider commencing a TTR pension to pay debt faster.
- Cover capital costs – you might have upcoming capital expenses such as a new car or caravan, a holiday to North Korea, or home renovations. TTR pension income can assist with funding this.
Related Article: Retirement Planning Strategies
How to Start a Transition to Retirement Strategy
To start a transition to retirement strategy, you first need to contact your superannuation fund to see if they offer transition to retirement pensions. If so, you can decide how much of your super balance you would like to start the TTR pension with, keeping in mind that leaving part of the balance in your super accumulation account is generally beneficial, so that the account remains open to accept future contributions and that any insurances remain in place.
During the application process, the TTR pension form will ask you how much you will be starting the pension with, where the money will be coming from and the amount of income you would like to receive.
Before starting a TTR pension, you should ensure that you have notified your super fund of your intention to claim any personal concessional contributions previously made and that they have acknowledged this. Failure to do so prior to commencing a TTR pension is likely to result in you missing out on the tax deduction.
Once the TTR Pension is established, you can decide how much would be beneficial to salary sacrifice into super (or the level of personal deductible contribution if you are self-employed). You will need to speak with your employer about the salary sacrifice arrangement.
Should I Start a Transition to Retirement Strategy?
If you are over age 60, but under 75, and have a taxable income in excess of $18,200, a transition to retirement strategy can be beneficial. However, your specific situation will determine the validity of a TTR strategy and how it should be established.
Obtaining personal financial advice will not only help you calculate the benefits of a TTR strategy, but the cost of advice will usually be recouped quite quickly in tax savings. And, most importantly, you can be confident that the strategy is being implemented correctly.
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:
- Transition to Retirement
- Transition to Retirement Pension
- Transition to Retirement Strategies
- TTR Pension Rules For Super
- Individual income tax rates 2022, Ato.gov.au, viewed 5 April 2023, <https://www.ato.gov.au/rates/individual-income-tax-rates/>.
- Transition to retirement – Moneysmart.gov.au 2023, Moneysmart.gov.au, Moneysmart, viewed 5 April 2023, <https://moneysmart.gov.au/retirement-income/transition-to-retirement>.