Transition to Retirement Disadvantages

There are a few disadvantages associated with Transition to Retirement income streams that one should be aware of prior to implementing such a strategy.

A superannuation Transition to Retirement (TTR) income stream pension is commenced using some or all of your superannuation accumulation balance.

A Transition to Retirement pension allows you to access part of your superannuation while you are still working, provided you have reached your superannuation preservation age.

The new changes to superannuation from 1 July 2017 have made transition to retirement income streams and transition to retirement strategies less desirable.
 

Transition to Retirement Disadvantages

 
When discussing superannuation transition to retirement disadvantages, both disadvantages associated with transition to retirement pensions and a transition to retirement strategy should be addressed.

A transition to retirement strategy includes the commencement of a transition to retirement pension, but a transition to retirement pension can be started without implementing a full transition to retirement strategy.

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Let me explain.

What is a Transition to Retirement pension?

A transition to retirement pension is an income stream that you have chosen to commence using all or some of your superannuation accumulation account balance.

You are able to do this even if you are still working, provided you have reached your superannuation preservation age:

Date of Birth Preservation Age
Prior to 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
On or After 1 July 1964 60

 

Transition to Retirement Pension Disadvantages

 
The superannuation Transition to Retirement rules require you to withdraw an income from the pension each financial year of between 4% and 10% of the account balance; no more, no less. This is calculated on the pension account balance as at 1 July of each year. If the pension started part way through a year, the calculation can be pro-rata.

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The disadvantages of transition to retirement pension income streams are as follows:

Depleting Your Super Balance:
You are accessing your superannuation savings prior to retirement and therefore depleting your retirement balance. If you are not replenishing your superannuation accumulation balance with at least the same amount as is being withdrawn in pension payments, then you may find you have inadequate savings to achieve your retirement objectives once you permanently retire.

Tax on Earnings:
From 1 July 2017, all earnings (including capital gains) received from assets supporting a Transition to Retirement pension will be taxed at 15%. Capital gains tax (CGT) will effectively reduce to 10% if the asset sold was owned for longer than 12 months, as a 1/3rd CGT discount will apply. Prior to 1 July 2017, all earnings received from assets supporting a Transition to Retirement pension were received completely tax free, just like an ordinary account based pension.

Tax on Income Under 60:
If under age 60, the taxable portion of your transition to retirement pension income will be taxed at your marginal tax rate, less a 15% offset (except taxable (untaxed) component – taxed at MTR, no offset). The taxable portion is made up of the taxable component within your balance. You can find out your taxable component balance by contacting your superannuation provider. The tax-free component portion will be received tax free. All pension payments must be made proportionately from the taxable and tax free components. For example, if 80% of your balance is made up of the taxable component and 20% of the tax-free component and you were to receive a pension payment of $20,000, then $16,000 of that payment would come from the taxable component and $4,000 from the tax free.

Two Accounts:
If you do start a Transition to Retirement pension, but will continue to make contributions to super (or your employer will on your behalf), then you will be required to have an accumulation account and a transition to retirement account, as contributions are unable to be made to a pension account. Having two accounts may increase the cost of maintaining your retirement savings and increase the complexity of your financial situation.

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Transition to Retirement Strategy Disadvantages

 
A superannuation Transition to Retirement strategy involves salary sacrificing as much as possible into superannuation and then drawing an income from a Transition to Retirement pension to supplement your remaining salary, so that you can still afford to cover your personal living expenses. The advantage of this is that less of your salary is being tax at your marginal tax rate (due to being salary sacrificed) and is being replaced with (hopefully) tax free income from super. However there are some problems and disadvantages.

Note: I use the term salary sacrifice, but this can also mean personal concessional (deductible) contributions (i.e. self employed contributions).

All of the Above Applies:
All of the Transition to Retirement pension disadvantages, noted above, also apply to a Transition to Retirement strategy as well.

Tax on Contributions:
As a Transition to Retirement Strategy involves salary sacrificing a portion of wage into super. All contributions are low tax super contributions and incur 15% contributions tax. An additional 15% contributions tax is payable on salary sacrifice contributions for high income earners.

Under Age 60:
For people over age 60, all Transition to Retirement pension income is received tax free (except taxable (untaxed) component – taxed at MTR, less 10% offset). Therefore, in most cases, a person over age 60 is salary sacrificing income that would otherwise be taxable at their marginal tax rate and replacing it with tax free income from a transition to retirement pension. However, for people under age 60, only the tax free component portion of the income will be received tax free. So, if a person, under age 60, has a superannuation balance consisting predominately of the taxable component, a Transition to Retirement strategy generally provides no benefit (from 1 July 2017).

Calculate your own preservation age here.
 

Can You Stop a Transition to Retirement Pension?

 
You are able to stop a Transition to Retirement Pension at any time. This is done by rolling the balance of the pension back to accumulation phase. You just need to ensure that the minimum pension income payments have been received for the financial year that the roll back occurs, prior to transferring the balance back to accumulation phase. If you decide to stop the Transition to Retirement Pension part way through a financial year, the minimum pro-rata pension payment needs to have been met. For example, if the minimum pension payment over a full year was calculated as $20,000 (assuming a balance of $500,000 and the transition to retirement pension payment factor of 4% p.a.) and you decided to stop the pension after 3 months (25% of the year), then you will need to have ensured that at least $5,000 (25%) in pension payments has been received.

Transition-To-Retirement-Disadvantages
 

Transition to Retirement Changes 2017

 
There is only one change being made to Transition to Retirement from 1 July 2017. That is, the earnings within the account will now be taxed in the same manner as an accumulation account – 15%, reduced to 10% for capital gains received from assets owned longer than 12 months.

A Transition to Retirement pension will not count towards the Transfer Balance Cap and therefore not subject to excess Transfer Balance Cap Tax on Notional Earnings.

Chris Strano

Chris Strano created SuperGuy to help the average punter navigate through the complex and ever-changing super rules. It has since become one of Australia's leading digital super resources. If you’re looking for more personalised advice, have a chat with one of our experts at www.superguy.com.au/need-advice

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42 Comments

  1. Geoff

    Hi If I roll back my transition to retirement fund back into my accumulation super fund will it be assessed as a an asset by Centrelink for disability pension purposes, I am 62y old.

    Reply
  2. Gary

    Hi, I have a transition to retirement fund going now. I am 57years old,and I draw down $29,000 from my fund and earn only about $20,000PA part time which I salary sacrifice into the fund.Is it still viable for me with the new changes to be in the TTR or should I change it back to accumulation phase till I am 60years old.I don’t require the income as I have other assets, and I could still salary sacrifice 50% of my wage.Any thoughts or suggestions would be Appreciated.

    Reply
    • Chris Strano

      Hi Gary,
      Salary sacrifice concessional contributions incur contributions tax of a flat 15%. Therefore, salary sacrificing into super when your highest marginal tax rate (MTR) is less than 15% will not provide any tax advantage.
      As of 1 July 2017, all earnings within a TTR pension account are taxed in the same manner as accumulation phase.
      The taxable component of your pension payments received from a TTR Pension are taxed at your MTR, minus a 15% rebate. The tax free component of your pension payments are received tax free.
      Generally, if a person pays little or no personal income tax from wages and income from personal investments, a TTR pension and salary sacrifice strategy will not provide any benefit.

      Reply
  3. Gary

    Thanks for the reply. I have an income of about $60,000 from other investments which I live of including rental and dividends.Do you think its more viable to stop the ttr and just salary sacrifice most of my wage into a accumulation fund till I am 60 and then reopen a pension fund? Or to continue my ttr till then? It just seems I am paying twice the tax now. 15% into the fund, then my marginal tax rate of 32% of what I take back out, minus the 15% rebate (29000-4350=$24650+60,000. My pension fund balance is about $770,000. What is your opinion for me to do till I reach 60 years of age? I am getting conflicting suggestions from advisors. Thanks

    Reply
    • Chris Strano

      Hi Gary, unfortunately this is a general information site only. I am unable to provide you with personal financial advice. It’s a shame that you are getting conflicting advice, as the answer you seem to be looking for is purely mathematical. Your adviser should be able to provide you with suitable advice in relation to this and explain the basis. If not, I would be seeking a new adviser.

      Reply
  4. Neil Liddell

    I commenced a TTR on the same night the Budget brought in the changes. I am 62 next March and still work full-time. I am drawing down the minimum 4% pa but re-depositing into my wife’s super fund as I do not want to lose our overall combined super savings. I am thinking of cancelling my TTR and rolling the balance back to my accumulation fund so that I do not have 2 funds and additional fees etc. Would you consider this the most prudent option?

    Reply
    • Chris Strano

      Hi Neil, Prior to 1 July 2017, one of the benefits of a TTR pension was that all earnings within the account were received tax free. This is no longer the case, as all earnings are now taxed in the same manner as an accumulation account. Even for people who do not require the TTR Pension income to cover living expenses, it can still be beneficial to retain the TTR pension and recontribute back into super as a) a concessional contribution – providing a tax deduction for the contribution or b) a non-concessional contribution to convert ‘taxable’ to ‘tax-free’ components. However, having an accumulation and TTR pension account and accumulation account does add complexity (and possibly increases fees), so the benefits need to be weighed up. Click here to read about the difference between a non-concessional and concessional contribution AND taxable and tax free components

      Reply
  5. Ken

    I am 60 and just lost my job. At this age it is difficult to find one so I would like to receive new start allowance while I look for new job but the payment is insufficient to cover my expenses. I am thinking of starting a TTR pension to replenish my income. Would you advice how the TTR pension may affect the amount of new start allowance I can receive?

    Reply
  6. Wally

    Hi, I have 2 questions on TTR pension:
    1. Can I start a TTR pension before 31 June, to be paid annually and immediately draw the maximum annual amount of 10%, or the maximum will be pro rata to the remaining days of the financial year?
    2. Can I roll the pension back to super account immediately after the payment, so that I don’t need to maintain two separate accounts?
    Your opinion is much appreciated.

    Reply
    • Chris Strano

      G’day Wally,
      1. A TTR Pension can be commenced part way through a year and still allow you to draw the maximum amount of 10%. The maximum limit is not pro-rata.
      2. Yes, you can roll the pension back to a superannuation accumulation account immediately after payment.

      ….some things to consider…. the above is based on superannuation legislation. Sometimes a superannuation fund will limit flexibility of superannuation legislation via their trust deed. A trust deed may restrict what legislation allows. For example, some superannuation funds say that, if you commence a TTR Pension and opt to receive the maximum 10% in one payment, the payment must be made in June.

      There are many other examples too. It is best to speak with your superannuation provider to see what they allow. Tell them what you are trying to achieve and they are usually very helpful.

      Reply
  7. Dave

    Hi Chris

    Firstly its not many people who would respond to EVERY commenter so thanks thats awesome of you!

    I am confused about no benefit in relation to TTR under 60.

    I earn around $60k per year as a salary. I was planning to sal sac around $20k to get to the $25k cap and drawn down around $16k to cover my expenses plus the 17.5% tax that would be applied to the draw down.

    I see this as giving me a advantage to my super per year….

    I hit my preservation age (57) in December when I can start this.

    What am I missing?

    Thanks

    Reply
    • Chris Strano

      Hi Dave,
      Thanks for the comments. This is a common confusion with many people. Your TTR Pension income is not taxed at 17.5%. Let me explain.
      1. Your TTR Pension is invested and all earnings are taxed at up to 15% within your account
      2. Your TTR Pension balance is made up of ‘tax-free‘ components and ‘taxable‘ components
      3. All TTR Pension drawdowns must be made proportionately from the tax free and taxable components
      4. The tax free component portion of your TTR Pension payments are received completely tax free
      5. The taxable component portion of your TTR Pension payments are taxed at your marginal tax rate, minus a 15% rebate

      Under the assumption that your total balance (or large majority of your balance) is made up of the taxable component, there is no benefit, because salary sacrifice contributions incur 15% contributions tax upon entering the fund and then draw downs (TTR pension income) is taxed at your marginal tax rate, minus a 15% rebate (which is intended to represent a refund of contributions tax). Therefore, whether you are taking the income as salary, or salary sacrificing and drawing TTR Pension income, either way the total amount is effectively being taxed at your marginal tax rate.

      Once you reach age 60, however, all TTR Pension income is received tax free, making the strategy worthwhile. Also, if your TTR balance includes a reasonable level of tax free components, then the strategy may also be valid. Contact your superannuation provider for information on the tax components that make up your balance.

      Hope that makes sense!

      Reply
      • Dave

        Thanks so much Chis I really appreciate you taking the time to explain this.

        As you guessed my super balance is all taxable so you are correct – no advantage.

        Your help has saved me from a whole lot of hassle for no gain.

        Thanks again.

        Dave

        Reply
  8. Lesley

    Hi Chris,
    I am 60 – Earn approx. 65K gross in salary and another 7K in taxable investment income. I have a super balance of approx. $310K … what would be the advantages and disadvantages of a TTR in my situation.

    Reply
    • Chris Strano

      Hi Lesley,
      Any amount salary sacrificed into super incurs contributions tax of 15%, rather than being taxed at your personal tax rate, which could be higher. However, by salary sacrificing, you will have a lower salary paid into your personal bank account to cover living costs. A TTR Pension could top up this reduced salary. Being over age 60, all of your TTR Pension income would be received tax free (unless your balance includes taxable-untaxed components. Contact your super provider to find out). Think about how salary sacrificing and then replacing the salary sacrificed amount with tax free TTR Pension income might benefit you.

      Make sure you take into account concessional contribution caps.

      Reply
  9. Geoffrey Galloway

    I have Credit Card debt and want to start a transition to retirement scheme to pay off some of the debt. I want to take 8000 a year then salary sacrifice 4000 to save some tax. Is this a worthwhile plan. I plan on doing this till age 65.

    Reply
    • Chris Strano

      Hi Geoffrey, I am unable to provide personal advice or tell you what you should do.
      Consider this:
      1. What is the interest rate on your credit card?
      2. What is the expected earnings rate on your super (after-tax)
      3. Would paying off credit card debt effectively provide a better return?

      Reply
  10. Julie

    Just trying to absorb your comment on TTR not being worth it if you are under 60 and have low tax free component. I have done the calcs on my super, and TTR still provides several benefits despite only 10% tax-free component – I save $1,000 per year in tax which i leave in super, and still net the same income after tax..

    Reply
    • Chris Strano

      Hi Julie,
      Thanks for your comment.
      A TTR Strategy designed to minimise tax is generally not worth it for people under age 60. However, each individual will have different circumstances and sometimes there will be a reasonable benefit.
      Make sure you are taking into account contributions caps, contributions tax, as well as any costs associated with holding a second account, plus potential transaction costs and CGT in transferring money to a TTR.
      Also consider the administrative requirements of running two accounts. Investments can be pooled in a SMSF, but this will result in higher accounting costs.

      Reply
  11. Andrew

    Hi Chris
    I am turning 60 in 2 months and considering a TTR for a year or so , alternatively retire fully at 60. I would work 3 days per week for $80,000 gross. I have $900,000 in superannuation. We are building a new house so want some flexibility for extra unplanned costs. Is a year on TTR worthwhile?

    Reply
  12. Marc

    Once you have achieved preservation age what is the maximum contribution to superannuation including employer & salary sacrifice contributions?

    Reply
  13. leigh giroud

    I have recently established a TTR with Vic super. I have a so-called flexible income account which my TTR funds are paid from. They have set up a separate account called future saver where my salary sacrifice and employer contributions are going. This is starting from zero balance I thought the contributions would go into my one flexible income stream account. Your thoughts please

    Reply
  14. Yan Sabudin

    Hi, how much usually does financial planner charge to set up a TTR account.

    Reply
    • Chris Strano

      Could be anything really. If the scope of advice is purely limited to starting a TTR account and investment recommendations for the account balance, you could maybe get it for as low as around $1,500, but you could also pay up to around $4,000. It really depends on the service you are getting.

      Reply
  15. David

    Hi Chris – is it possible to have a transition pension ( having reached preservation age) and take your 10% maximum part way through the year then commute that pension back to accumulation and latter in the same year start a new pension from the accumulation and take another 10% of the new pension amount- in effect taking 2 lots of 10% in the same year ?

    Reply
    • Chris Strano

      Hi David, unfortunately not! the 10% limit is the maximum amount that can be withdrawn in any one financial year.

      Reply
  16. michael sheridan

    Hi Gary
    I will turn 60 in September. As a step toward a self managed super income I was considering a lump some withdrawal to purchase an investment property. The rent from this would help supplement decresed working hours, with the hope of appreciation on the property also. Whats your thoughts on such a move, especially around tax on such a move.

    Reply
    • Chris Strano

      Hi Michael,
      There’s a little bot of mixed terminology i your question. A self managed super fund is a type of superannuation fund managed by you (rather than an external trustee). If you make a lump sum withdrawal, the savings are then in your own name and no longer in super – therefore no longer ‘super income’.
      Your ultimate question raises dozens more questions. But, put simply, investing all of your savings into one asset (a property) can be considered a high risk strategy, when a more diversified investment portfolio is also capable of providing you with income to supplement work hours.
      Secondly, by making a lump sum withdrawal out of super, you are removing them from a concessional taxed environment (max 15% tax) into your personal name, where your marginal tax rate could potentially be higher than the tax rate within super.
      In this situation, especially given that you are transitioning to retirement, I would strongly suggest obtaining financial advice. I believe you would benefit from it, rather than making possible poor decisions with your retirement nest egg.

      Reply
  17. David

    Hi Chris, My wife and i are both 57, work full-time and have about $150k each in super. Our combined income is about $170k. We are considering a TTR pension and using it towards paying off our mortgage sooner. Based on taking the 10% maximum allowance for a TTR, this would halve the time remaining on the mortgage. ( Current time remaining 14 years ) Would you consider this a favorable strategy.

    Reply
    • Chris Strano

      G’day David, thanks for the question.
      A favourable strategy is relative, based on what you are trying to achieve. For example, if your objective is to pay down debt asap, then withdrawing money from super may be the best thing to do. However, it may not be the most financially beneficial. Consider this: If your super earns an average long-term return of, say 6% p.a., and your mortgage has an interest rate of 4%, you might be effectively forfeiting a 6% return in exchange for a 4% return. Does that make sense? However, paying off the mortgage is essentially a ‘guaranteed’ return, whereas your super returns are not. You also want to take into account tax payable on TTR Pension income, especially given your level of salary.
      I know I haven’t answered your question, but I am unable to answer it without knowing your specific objectives and super account balance details. Hopefully this provides you with enough to think about though.
      Between the ages of 50 and 60 is the most important time to take advantage of the superannuation rules and transitioning into retirement. Based on your respectable balances and decent income, I would strongly suggest speaking with your financial planner regarding the options available to you, so that you can build towards a solid retirement plan.
      Regards,
      Chris

      Reply
  18. Linda

    Hi,

    I am 60 years old and would like to access my super to buy a new car. I still work full time but would like to access approx $30,000 from my super since I don’t have the cash at the moment. Is TTR the way to go for me to access this money??

    Reply
    • Chris Strano

      Hi Linda,
      A TTR Pension allows you to access up to 10% of your account balance each financial year. However, you should be aware that there may be costs incurred in commencing a TTR Pension and, as you are still working, you will likely still need an accumulation account to accept contributions, because contributions are unable to be made to a TTR Pension account.
      If you do happen to end an employment arrangement, you will have unrestricted access to the super you have built up to that point – even if you return to work in another job.
      Regards,
      Chris
      Related Posts
      TTR Pension Over 60
      Super Rules for Over 60
      Can I Access My Super at 60 and Still Work?

      Reply
      • David

        Hi Chris,

        This is the clearest info on Super anywhere!

        I was divorced years ago, but still in a joint mortgage. I would like to pay out my share in full but can’t afford to. I need around $40,000. I have a bit over $400,000 in super. I am over 60 and in part time work earning about $45,000 a year. I don’t want to stop working yet.

        I have been in and out of work over the past years and wish I’d known I could have had access to super to pay off debts.

        If I was to set up a TTR account with most of the $400,000 balance, take out 10 per cent and then put the remaining back into the accumulation account what are the downsides?

        Reply
        • Chris Strano

          Hi David, thank you for the kind words. The downside of setting up a TTR pension is that it may incur potential capital gains tax (CGT) implications if investments need to be sold and then repurchased in the TTR Pension account. Also, there may be transaction costs if investments need to be sold and purchased. This will depend on your super provider. You should be able to ask them if these things will be an issue.
          You might consider leaving a small balance in accumulation account so that the account remains open. This is especially important if you hold insurance within the account, because if you close the account completely, the insurance will be cancelled and may be difficult to obtain in the future. Also, if you have made personal deductible contributions to your super account this financial year, you will need to notify the fund of your intention to claim a tax deduction, prior to starting the income stream.
          That’s pretty much all I can think of from the top of my head. Apart from that, it’s just a bunch of paperwork.
          Regards,
          Chris

          Reply
          • fo Mark

            After reading all your info can you advise if I have it correct for my situation. Reaching preservation age on 22nd June. I will have about $25000 left on mortgage. Can I create a TTR on June 22nd and take out Lump sum before 30th June. To pay mortgage off. Is that correct how it will need to be done, or do I have to wait another 12months to access lump sum amount. And The tax comes straight out of my account balance not what I withdraw is that correct. Thanks

          • Chris Strano

            Hi Mark,
            Thanks for your question.
            A transition to retirement income stream can be started once you reach your superannuation preservation age. You can draw an income between 4-10% of your account balance, based on the balance value at the date of commencement. Depending on the specific payment options associated with your super fund, this payment could theoretcially be made as a one-off 10% payment prior to 30 June. Many super funds will deduct PAYG on your pension payment and pay you the net amount (after tax) into your bank account… kind of like an employee receiving a wage. Your super fund should then provide you with a payment summary so you can complete your tax return. Importantly, PAYG is only a

              provision

            for tax and may not be accurate. That is, you may need to pay additional income tax if you have other sources of personal income and if your suepr fund did not deduct enough.
            Hope this helps,
            Regards,
            Chris

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