Before discussing how a Transition to Retirement Strategy works and the Transition to Retirement Rules, I will first explain how the term ‘Transition to Retirement’ was born.
Traditionally, people would work up until a certain age, then retire and begin drawing an income stream from their superannuation savings. This income would be used to assist in covering a person’s living expenses throughout retirement (in conjunction with other sources of income and/or the Centrelink Age Pension or Department of Veteran Affairs (DVA) entitlements).
Click here to learn how to access your superannuation even if you are still working.
2007 Simpler Super – transition to retirement rules
On 1 July 2007, the Government introduced the Simpler Super reforms. Part of these reforms was allowing people to access their superannuation savings in an attempt to keep them working for longer.
This way, rather than completely retiring from work, the Government anticipated that people would cut back to part-time or casual work and have the ability to use their superannuation savings to supplement their income.
Ultimately, this was intended to reduce the strain on social security benefits provided by the Government, as people who would have ordinarily retired continue working in some form – not only reducing the erosion of their own savings, but also potentially paying tax on work-related earnings.
Access to Super Savings
Having the ability to access your superannuation savings is known as a ‘Condition of Release’. There are many forms of Conditions of Release.
One such Condition of Release is attaining your Preservation Age.
If you have attained your Preservation Age and have ceased work, with no intention of returning, you will have full access to your accumulated superannuation savings. In this instance, the Transition to Retirement Rules are not relevant.
Transition to Retirement Rules
However, you are also able to access your superannuation savings if you have reached your Preservation Age and are still working provided you abide by the Transition to Retirement rules.
This is done in the form of commencing a Non-Commutable Account Based Pension.
You may see a Transition to Retirement (TTR) Pension be referred to as other names such as:
- Non-Commutable Account Based (or Allocated) Pension (NCAP)
- Transition to Retirement Income Stream (TRIS)
- Transition to Retirement Income Pension (TRIP)
How does a TTR Pension Work?
If you have reached your Preservation Age and are still working, you can commence a TTR Pension with some or all of your superannuation balance. However, it’s important that you stick to the Transition to Retirement Rules.
Once a pension has commenced, you are required to draw an income between 4% and 10% of the account balance as of 1 July of each year (or from when the TTR Pension commenced – pro-rata).
For example, let’s say that you have a superannuation balance of $510,000 and you are 57 years old. You may consider commencing a pension with $500,000 and leave the remaining $50,000 in your existing accumulation account. Once a Pension has commenced, no further contributions are able to be made to the Pension. Therefore, if you are still working, it’s generally a good idea to keep a small balance in the accumulation account so that the account remains open and can accept future contributions such as SG Contributions, Salary Sacrifice, etc.
If the $500,000 pension was commenced on 1 July, the minimum and maximum income thresholds for the financial year would be $20,000 (4%) and $100,000 (10%). You will be required to draw and income between these amounts prior to 30 June of the following year.
This income can be used in conjunction with employment income to assist with covering your living expenses.
Transition to Retirement Rules for under age 60’s
Commencing a TTR Pension between your Preservation Age and age 60 may see part of the pension you receive being taxed. Your superannuation savings are made up of a ‘Taxable Component’ and a ‘Tax-Exempt’ component. The proportions of these components will fluctuate daily in Accumulation phase. However, once you commence a Pension with your superannuation savings, the component proportions remain static (a statement received from your superannuation provider should detail the components associated with your account – otherwise give them a call).
The ‘Taxable’ portion of your pension will be recorded as assessable income and taxed at your marginal tax rate (MTR) each year. However, you will receive a tax offset equal to 15% of the Taxable payment that you receive each year.
The ‘Tax-Exempt’ portion of the pension will be received tax free.
EXAMPLE: Let’s say that you commenced a pension with $500,000 of your superannuation savings. Let’s also assume that upon commencement 50% ($250,000) of this pension is made up of the ‘Taxable’ component and 50% ($250,000) is made up of the ‘Tax Exempt’ component. Being between the ages of 55 – 64, you are required to draw an income stream between 4% ($20,000) and 10% ($50,000) of your account balance. For the purposes of this we will assume you decide to draw the minimum. This means that $10,000 of your payment will be assessable and taxed at your MTR, but you will receive a tax offset of $1,500 (15% x $20,000). The remaining $10,000 – being the ‘Tax-Exempt’ portion – will not incur tax.
Transition to Retirement Rules for ages 60 – 65
All TTR Pension income received by those over the age of 60 is completely tax free regardless of the tax components.
NB: If you are over age 65, all pension income is also received tax free. In this instance you would not commence a TTR Pension, you would commence an ordinary account based pension, as you have met a full condition of release and would not want to restrict access in regards to levels of income.
TTR Pension Strategy for full-time workers
As we mentioned before, Transition to Retirement Pensions were intended to allow people to cut down to part time or casual work hours and supplement their income from a superannuation pension income stream. But, since the introduction of TTR Pensions, many people employ a strategy (usually based on advice from a financial planner or accountant) whereby they salary sacrifice part of their wage into superannuation – possibly leaving them with a cash flow shortfall – and then drawing the amount required to cover the shortfall from a super pension.
How is this beneficial?
Well, salary sacrificing part of your wage into superannuation will result in this salary sacrificed amount only incurring Contributions Tax of 15%, as opposed to being taxed at your MTR. Therefore, if the MTR on the amount salary sacrificed is greater than 15% – tax on this amount will be lower. To cover the ‘hole’ this now leaves in your cash flow, you can:
Under age 60 – draw a tax-effective income stream where some of the income may be received tax-free, or at the very least receive income that has a 15% tax offset associated with it (except for the taxable (untaxed) component.
Over Age 60 – draw a completely tax free income stream (except for the Taxable (untaxed component)
Furthermore, all earnings (income, interest and capital gains) received from investments within your superannuation pension account are received tax free. This compares to earnings being taxed at up to 15% in Accumulation phase.
If you would like anything clarified or have any further questions about Transition to Retirement Rules or any other topics, please do not hesitate to leave a comment in the section below and I will endeavour to respond within 24 hours.