This fact sheet provides additional information to help with understanding the investment, tax and other financial planning concepts that we have discussed with you or included in your Statement of Advice.
Please contact your adviser if there is any aspect on which you need further information or clarification.
What is a Transition to Retirement strategy?
You can use a Transition to Retirement (TTR) strategy to boost your superannuation balance. You contribute some of your income to superannuation and make up the difference by drawing a pension from a TTR pension account. Where your income tax rate is higher than the superannuation contributions tax rate, you may pay less tax, even though you are still receiving the same level of income.
What is a Transition to Retirement pension?
Once you contribute money to superannuation, you have to meet strict conditions to access your retirement savings. These conditions of release include reaching age 65, reaching your preservation age and fully retiring or ceasing an employment arrangement after the age of 60.
A transition to retirement (TTR) pension is a form of account-based pension, available to individuals who have reached retirement age but have not yet met a condition of release.
Drawing a TTR pension means that you can continue to work, possibly in a reduced capacity (fewer hours), while drawing an income from your superannuation balance. The TTR pension increases the options available to transition from work to retirement, and can also help to prolong your superannuation savings.
Key Features of TTR Pensions
- For persons aged 60 or older, income from an account-based pension is free of personal tax.
- If you are between 55 and 60, a 15% rebate applies to the taxable income drawn from your account-based pension. The taxable income is the total pension drawn less the tax-free amount.
- While the TTR pension income attracts concessional tax treatment, the earnings on the underlying assets continue to attract earnings tax at 15% until you you meet a condition of release, e.g. you reach age 65 or fully retire.
- You cannot make lump sum withdrawals from the TTR pension until you meet a condition of release, e.g. you fully retire or reach age 65.
- Each financial year, you must draw an income between a set minimum and maximum limit, calculated at the beginning of the financial year (or at pension commencement if in the first year).
- You can stop the pension at any time, and your money will be 'rolled' backed to superannuation.
- Centrelink will include the account balance of the TTR pension and a portion of the pension payments in assessing your eligibility for the age pension.
TTR Pension Strategies
A common strategy is to combine the TTR pension with salary sacrifice contributions to superannuation which may boost your tax savings even further.
Instead of paying your marginal rate of tax, which can be up to 46.5%, you can sacrifice some of your pre-tax salary and potentially pay just 15% tax by making a superannuation contribution.
The income from the pension replaces your reduced salary, meaning that you may be able to receive the same, if not more income than before. Alternatively, you may prefer to keep your take-home income the same and use the tax savings to increase your superannuation contributions.
Example 1 - Transition to Retirement
Lisa (age 60) would like to reduce her working hours but not retire altogether, as she enjoys her work and its social aspects. She decides to work three days a week instead of five days, but is concerned about how she will manage on a reduced income.
Lisa already has $250,000 in superannuation and is currently on a full-time salary of $60,000, providing her with a net income of $48,053 and net super guarantee contributions of $4,845.
When she goes part-time, her salary reduces to $30,000 ($27,758 net), but Lisa feels she now only requires a net income of $38,000, as she has paid off her mortgage and her children have left home.
Lisa decides to commence a TTR pension and draw $10,000 per annum, giving her total net income of approximately $38,000.
Example 2 - Transition to retirement and salary sacrifice
Tony (age 57) is working full time on a salary of $80,000. Tony wants to maintain his lifestyle, save on tax and build his superannuation before his planned retirement at age 65. Tony currently has a superannuation balance of $300,000.
Tony decides to commence a TTR pension with $250,000, and salary sacrifices some of his income. By salary sacrificing $15,000 and drawing $12,500 per annum from a TTR pension, Tony will have approximately the same net income. He will save $50,764 in tax, and he will have contributed an additional $48,224 to superannuation by the time he is age 67.
Tony is contributing more to superannuation than he withdraws. By making contributions from his pre-tax income and drawing a pension, he reduces his tax bill without affecting his cash flow or lifestyle.
Reviewing your TTR strategy
As superannuation and tax legislation change frequently, it is essential to review your TTR strategy at least once a year to make sure it remains compliant and beneficial for your situation.
A review involves analysing the amount you are salary sacrificing or contributing personally, and the amount you are withdrawing from your TTR pension account.
In particular, you will have to ensure that:
- the amount you are withdrawing from your TTR pension account remains within permitted limits
- your employment and other income remains at a sufficient level to make the salary sacrifice arrangement beneficial
- the combined amount of salary sacrifice and employer contributions do not exceed the cap on before-tax contributions to superannuation
See here for more detail on superannuation contribution caps.
Risks of TTR Pensions and Strategies
Taxation and Legislative Risk
Decisions on pension commencement rely on interpretations of current regulations and legislative practices of the Australian Taxation Office (ATO) and other relevant government bodies, which is subject to regular change.
Market Risk
An account-based pension may contain a mix of cash, capital stable, diversified and specialist fund. The value of units in each fund may rise and fall, in line with the value of underlying assets as determined by market conditions.
If any time elapses between drawing a pension amount and contributing a similar amount back into superannuation, you will not generate any capital growth or income. If investment markets move up during this period, you may be disadvantaged.
Longevity Risk
Account-based pensions do not provide a guaranteed lifetime income. Your starting balance, investment earnings, how much income you withdraw and any lump sum withdrawals you may make determine the longevity of your account-based pension account. Payments will only continue while there is a balance in the account.
Important Information
Walbrook Wealth Management is a trading name of Barbacane Advisors Pty Ltd (ABN 32 626 694 139; AFSL No. 512465). Barbacane Advisors Pty Ltd is authorised to provide financial services and advice. This post is general information only and is not intended to provide you with financial advice as it does not consider your investment objectives, financial situation or needs, unless expressly indicated otherwise. You should consider whether the information is suitable for your circumstances and where uncertain, seek further professional advice. The author has based this communication on information from sources believed to be reliable at the time of its preparation. Despite our best efforts, no guarantee can be given that all information is accurate, reliable and complete. Any opinions expressed in this email are subject to change without notice, and we are not under any obligation to notify you with changes or updates to these opinions. To the extent permitted by law, we accept no liability for any loss or damage as a result of any reliance on this information.
