Transitioning to Retirement: Have Your Cake and Eat It

Transitioning to Retirement: Have Your Cake and Eat It

Are you thinking about retiring but not ready to give up work completely?


Benefits of a transition to a retirement pension

A transition to retirement pension (TTR) scheme provides you with the ability to withdraw from your super without having to give up work. So, essentially you can reduce your working hours while taking home the same income[1].

And the benefits don’t end here.

Depending on your super, some money you withdraw as a TTR pension may be tax free. The rest is assessed at your marginal tax rate(can be up to 47 percent including Medicare levy), but with a 15 percent tax rebate[2]

Once you turn 60 however, any money you withdraw from your super is completely tax-free.

Sound good?

Before you decide if this is the right option for you, here’s a few things to note.

Changes to tax concessions

Prior to 1 July 2017, any investment earnings funding your TTR pension were exempt from tax. 

Today however, things have changed.

TTR pensions are no longer considered a superannuation income stream in the retirement phase. As a result, any earnings on those assets are subject to 15 percent earnings tax[3], which applies to super.

These changes have therefore reduced the overall tax effectiveness of TTR pension schemes, especially when combined with further limitations on how much you can contribute to super.

It’s important to note though, the tax you pay on investment earnings outside super is generally higher[4] so there’s still benefit here.

How it could work for you

One of the extra steps some people with a TTR pension have taken is to make additional contributions to their super using their before-tax income. This helps to reduce their taxable income, but it also reduces their take home pay. By using the income from their TTR pension, they’re able to supplement it so they’re not losing out.

What about if you decide to continue working full time and are unable to make additional contributions to your super?

Well, receiving an income from a TTR pension may still be handy for other purposes. For example, paying off non-deductible debt such as a home loan or credit cards, could lessen your financial burden or better still, completely remove it by the time you retire.

The conditions

There are a few conditions attached to TTR pensions if you choose to take it on.

Condition 1: Your age

To be eligible for a TTR, you must have reached your “preservation age.” This is the minimum age that you can access your super.

Currently, the preservation age is 57, although it started at 55 and is gradually rising to 60[5]. But it really depends on when you were born – if were born on or after 30 June 1964, you’re required to wait until you turn 60 to be eligible for a TTR.

You can use the Moneysmart calculator to find out when you can access your super.

Condition 2: Access to super as an income stream

The second condition is that you can only access your super in the form of an income stream, drawing between 4 percent and 10 percent each year[6].

This means you can’t access any of your super as a lump sum. All of that changes however, once you meet a standard requirement to access your super, such as completely retiring or turning 65.

Start planning for your retirement early

Let’s face it, your retirement years shouldn’t be trying times – they should be enjoyed.

So, the best way to maximise the benefit of a TTR pension is to start planning early. The more you can save in super, the better opportunities you’ll have in retirement.

You can also learn more about the benefits of TTR strategies.

[1] https://www.moneysmart.gov.au/superannuation-and-retirement/income-sources-in-retirement/income-from-super/transition-to-retirement
[2] https://www.ato.gov.au/individuals/seniors-and-retirees/transition-to-retirement/
[3] Current as at 8 November 2018: https://www.ato.gov.au/individuals/super/in-detail/super-changes—faqs/?page=1#Transition_to_retirement_income_streams
[4] https://www.moneysmart.gov.au/investing/invest-smarter/choose-your-investments/make-tax-work-for-you
[5] https://www.ato.gov.au/individuals/super/accessing-your-super/
[6] https://www.ato.gov.au/Individuals/Super/In-detail/Withdrawing-and-using-your-super/Withdrawing-your-super-and-paying-tax/?anchor=Super_withdrawal_options&anchor=Super_withdrawal_options#Super_withdrawal_options

The article was prepared by BT, a part of Westpac Banking Corporation ABN 33 007 457 141, AFSL & Australian credit licence 233714 (Westpac), and is current as at 17 December 2018.

This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to these factors before acting on it. This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material.

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