- Are you aged 55 or over?
- Would you like to boost your retirement savings tax-effectively while you’re still working?
- Would you like to wind back your work hours without winding back your lifestyle?
How does it work?
A Transition to Retirement (TTR) strategy allows you to access your super while you’re still working – giving you a range of flexible working and lifestyle options. Provided you meet all the requirements, the first step is to convert some or all of your superannuation savings into a ‘non-commutable’ TTR income stream (sometimes called a ‘TTR pension’). Once the TTR pension is in place, you start receiving a regular amount of money. Income payments you receive from your TTR pension must be between 4% and 10% of your starting balance if you purchased the pension in the financial year. Income payments you receive in succeeding years will be calculated on your account balance every July. Receiving money from a TTR pension is just like getting paid a salary. The benefit is that it can be a more tax-effective way to receive income due to the following tax concessions:
- If you are aged between preservation age (currently 55) and 59, you get a tax offset equal to 15% of the taxable portion of income payments from your TTR pension
- If you are aged 60 and over, the income payments from your TTR pension are tax-free. What’s more, by converting your super to a TTR pension, the earnings on the assets supporting the pension become tax-free.
What does it mean for me?
There are two main ways you may be able to use a TTR strategy.
- Transition to part-time work without reducing your income. A TTR strategy may provide an effective approach for transitioning from full-time to part-time work. The principle behind this option is that you supplement your reduced salary with tax-free or tax-effective income payments from a TTR pension. In other words, you’re working less, but receiving the same income. And you may be paying less tax while you’re at it.
Naturally this variation of the TTR strategy is likely to result in less retirement savings than if you continue to work full-time. Whether or not you choose to draw down on your retirement savings before fully retiring, your full circumstances need to be carefully considered.
- Tax-effectively boost your retirement savings while you’re working full-time. If you’re still working full-time, you may be able to contribute some or all of your pre-tax salary into super and withdraw a tax-effective TTR pension to make up for the reduction in take-home pay. When you contribute some of your pre-tax salary into super, it is taxed at a flat rate of 15% by the super fund, provided the amount contributed is within allowable ‘concessional contribution’ limits.
While you’re still working full-time, this tax rate is likely to be lower than your marginal tax rate had you received this money as salary – helping you reduce your tax bill and boost your retirement savings.
Other points to bear in mind
- If your circumstances change and you no longer need the income generated by your TTR pension, you can roll the money back into accumulation phase.
- This strategy may benefit you even if you are on a lower marginal tax rate. This is due to the tax-free nature of TTR pension payments for those aged 60 and over, and the tax-free earnings on the assets supporting the pension.
- It’s important to ensure that the amount you salary sacrifice does not cause you to exceed your concessional contribution cap, and that your income payments from the TTR pension does not exceed 10% of the account balance.
Advice specific to your individual circumstances is strongly recommended before implementing a TTR strategy.