Transition to Retirement is a strategy that allows you to gradually move to retirement as you continue to work, whilst at the same time drawing down on some of your super benefits. The super benefits drawn down during this phase are known as pension payments or an income stream.
Alternatively, you may not want to reduce your hours of work, but wish to save tax by salary sacrificing into your Super leading up to retirement.
Or thirdly, as a Business Owner, you may want to supplement your income needs in quiet times.
Whatever your reason for transitioning to retirement, the benefit to you is a better lifestyle on the same income.
However, it is important to be aware that this TTR strategy can only be used when you have reached your ‘preservation age’. Generally speaking, your preservation age would be between 55 to 60 years of age depending on when you were born.
Ultimately with our longer life expectancies, us spending more time in retirement, and the increasing pressure on our Government’s social security system, we are being strongly encouraged to remain in the workforce longer than our traditional retirement age of 65. Consequently, a transition to retirement strategy will allow us to continue to accumulate more superannuation, save us tax and continue to grow our nest egg so it can ultimately last us longer in retirement.
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How does transition to retirement work?
Whether you do not want to work full time anymore or want to continue working full time and boost your concessional super contributions and save tax, in order to use the transition to retirement rules you will need to set up a TTR pension or income stream. Most superannuation funds now have this pension or income stream option.
Transition to retirement works by you contributing part of your salary to super. At this point this contribution will be taxed at a maximum of 15 cents in the dollar unless you are earning more than $250,000 per annum.
Then you move your superannuation money into a TTR pension and use the pension income to supplement your reduced salary. Although the tax-effectiveness of the pension payments will help lower your overall personal tax liability, it is important to note that since 1 July 2017 earnings on TTR pensions are being taxed at the same rate as accumulation accounts, thereby making TTR pensions less attractive for many individuals.
Benefits V Downsides
The benefits of using a TTR pension to reduce work hours include:
- Ease into retirement
- Supplementing your employment income
- Continue to receive employer contributions
- Pay less tax on income
The most significant downside, to using a TTR pension to reduce your work hours, is the impact it may ultimately have on your retirement lifestyle when you do finally stop working.
The benefits of using a TTR pension to maintain work hours and save tax include:
- Continuing to grow your superannuation
- Paying less tax on contributions
- Paying less tax on income
The most significant downside, to using a TTR pension to maintain work hours and save tax, is that it is not as effective if you are not older than 60 and not a middle to upper middle income earner.
Can transition to retirement work for you?
Other considerations before transitioning to retirement
Transitioning to retirement can be a complex strategy that has many considerations. It is strongly advised and wise that you discuss your options with a licensed financial advisor to assess if this income stream is right for you and your circumstances, and how it fits in with your work, superannuation and long term retirement plans.
Please also consider:
- Checking your fund type to confirm if a TTR pension is available
- Work out your retirement strategy in relation to your overall retirement plans
- Decide on your income needs as you may not need to replace all of your current income
- The impact on any Government entitlements
- Check on your life insurance as TTR pensions do not hold any insurance cover
- Use of this strategy through a SMSF requires the SMSF Trust Deed to be drafted appropriately
The most important thing to remember about a transition to retire strategy is that it will potentially result in a smaller nest egg in retirement through your super, which could affect your lifestyle when you are fully retired. However, if you want to scale back your work hours whilst minimising the drop in your income, then a TTR pension is worthy of consideration.