Transition to retirement (TTR)

Transition to Retirement (TTR) Pensions: Pros, Cons & Rules to Know

Ensuring a comfortable retirement should be a top priority for everyone, especially those approaching the age of seniority. A smooth transition into retirement itself is also of consideration for many people. To do this, some opt for a retirement and superannuation planning option called a transition to retirement pension.

However, there should be careful deliberation before buying into a transition to retirement pension. 

While a transition to retirement (TTR) pension can help ease some people into retirement, there are both pros and cons to this retirement planning strategy. A TTR pension is mainly funded by your superannuation, which effectively reduces funds available when you decide to retire permanently. 

As financial advisors, we recommend carefully considering any income streaming option before making a commitment. There are many SMSF and retirement planning strategies, and it’s important to get professional advice to ensure a solution is right for your individual circumstances.

To better understand the practicalities of a TTR pension and evaluate whether it is right for you, read on.

What Is a Transition to Retirement Pension?

A transition to retirement pension is a pension created by transferring some of the funds from your super into an account-based pension product. From this pension, you are then able to regularly withdraw funds as another stream of income to aid you in the last few years of your career before retiring. 

A transition to retirement pension may also be called a ‘non-commutable allocated pension’ or a ‘transition to retirement income stream’. A TTR can be the sole source of income or just a part of a broader transition to retirement strategy.

Commonly, those who opt for a TTR are people who are easing themselves into a permanent retirement by working at a reduced rate, whether they’re unable to work or would prefer not to. Fewer work hours, however, would consequently result in a reduced salary. A transition to retirement pension provides another income stream to compensate for the decreased wages. It can also simply be a supplementary source of income, as you can still work full-time even with a TTR pension.

The option to commence a transition to retirement pension becomes available once a worker reaches 55 years of age. This is the beginning of the so-called ‘age of preservation’, or the official age when one can access their superannuation, including a TTR pension. Before the age 55, super cannot be accessed, other in cases of severe financial difficulties, medical emergency, or death. 

What Are the Disadvantages of a Transition to Retirement Pension?

The main disadvantage is that a transition to retirement pension is solely funded by taking money from your superannuation. This means that there will inevitably be less super once you actually retire. 

While there is the option to salary sacrifice and refill the funds of your super with your own contributions, this will still take away from your employment income. The end result is essentially the same: you opt to get more money now at the cost of having less of it later. 

Depending on your circumstances, this could quite possibly lead to less financial comfort during your life as a retiree. You will also need to withdraw from your transition to retirement pension with care, as depleting it before you permanently retire can definitely hinder you from achieving your retirement goals.

Avoiding depletion of your super should be a genuine concern if you opt for a TTR pension, as it is easier to do so than one might think. ATO super withdrawal requirements dictate that you must withdraw a minimum of 4% and a maximum of 10% of your super’s balance each financial year. 

For the 2019-2020, 2020-2021, and 2021-2022 tax year, the ATO reduced this to a minimum of 2%. This reduction in minimum super withdrawals is a COVID-19 measure, and this returns to normal from 1 July 2022.  

Taking even 4% to 10% a year will still syphon away a sizable chunk of super if compounded over the years. The maximum withdrawal rate for a TTR not in the retirement phase is 10%, so you also can’t choose to withdraw more money. 

Another considerable disadvantage of accessing your super before retirement for a TTR pension is the taxation issues that come with this choice. Capital gains from transition to retirement pension investments are taxed at a minimum of 15%. However, this decreases to 10% if the asset was held for a minimum of 12 months due to a 33% tax offset. However, since there are no exemptions for capital gains tax in retirement other than certain SMSF asset sales, waiting until after retirement won’t necessarily allow you to avoid capital gains tax. 

If you’re also under 60 years old, the taxable component of the payments you received from your TTR pension are also taxed at your marginal or income tax rate, minus a 15% offset. This typically means that you will pay more in tax the larger your TTR pension withdrawals are.

What Are the Advantages of a Transition to Retirement Pension?

While accessing your super now for a TTR pension will inevitably reduce your nest egg in the future, what you do get is more current financial freedom and comfort as you transition to permanent retirement. 

You may choose to spend the money on something that you otherwise would not be able to afford without the TTR pension. For example, you may want funds sooner to buy a new house, have the capital for other investment strategies, or simply lead a more comfortable and leisurely life in preparation for retirement. Of course, all of this is more feasible with an additional source of income, especially if you opt to work part-time or take on a less demanding job.

Another possible advantage of starting a TTR pension is tax minimisation, depending on your circumstances. While tax rates can be a disadvantage, there are also circumstances where they can work in your favour. For most people, income streaming payments after the age of 60 are tax-free, the exception being if your super fund is not taxed. 

Another situation where a TTR pension can prove to be tax-effective is if you have a higher income and choose to replenish your super via salary sacrifice. You will inevitably have less income, but this may also result in a lower income tax rate. Although there is a 15% tax rate on contributions to your super made from salary sacrifice, this is possibly lower than the marginal tax rate you would have been paying if you received your full salary.

You should consult with a professional SMSF financial planner to determine if you’ll be better off with a TTR pension or another kind of income streaming arrangement. 

Are Transition to Retirement Pensions Still Worth It?

Before July 2017, all capital gains within a TTR pension were tax-free. After this, changes in legislation imposed a 15% tax on TTR-related capital gains

Starting a TTR pension was thus a more appealing option to a wider range of people prior to legislation changes. Although this change is significant and should be considered, a TTR pension can still be worth it, depending on your own financial situation and retirement goals.

Who Should Consider Transition to Retirement Pensions and When?

A TTR pension is a logical option for those who truly need or desire an additional source of income as they prepare for retirement. However, you should also be firmly confident you’ll still have enough funds to meet your retirement goals once you’re fully retired. 

Another thing to consider is the taxation involved in your super and your TTR, should you opt to start one. Those who are above 60 years old with high annual incomes can set up a TTR pension to be more tax-effective with their finances and effectively save more in the long run.

Starting a TTR pension under 60 and as early as 55 years old can still prove to be beneficial, but mainly if a sizable portion of your super is its tax-free component. 

Taxable portions of your superannuation include:

  • Employer contributions
  • Salary sacrificed contributions
  • Tax-deductible personal contributions 

Tax-free components include:

  • After tax contributions
  • Government co-contributions

If the majority of your super funds are tax-free, it may be viable to commence a TTR pension between 55 and 59 years of age. 

If a transition to retirement pension isn’t for you, consider talking to your financial planner above other income streaming options. There are a range of strategies that can help you make the most of your retirement funds, and the best approach is to get advice from a trusted financial planner, such as WealthVisory Private Clients

Related Questions

When Can You Start a Transition to Retirement Pension?

You are able to start a transition to retirement pension at 55 years of age. This is the ‘age of preservation’ or the age where you are granted access to your super. You can then use the money in your super to fund a TTR pension. However, the funds will not be tax-free until you’re over 60 years of age. 

Can You Take a Lump Sum From a Transition to Retirement Pension?

No, unfortunately you cannot withdraw a lump sum from a TTR pension.  You can only withdraw a maximum of 10% of the balance in your pension every year. 

Disclaimer:

This article is provided as general information only and does not consider your specific situation, objectives or needs. WealthVisory Private Clients makes no warranties about the ongoing completeness or accuracy of this information. It does not represent financial advice upon which any person may act. Implementation and suitability requires a detailed analysis of your specific circumstances.

Matthew Rutter, Director/Head Financial Advisor of WVPC

Matthew has a wide ranging background in business, finance, taxation and accounting with over 25
years’ experience, firstly as an Accountant before becoming a Financial Planner. Matthew has been in
the Financial Planning Industry since March 1998 and has been the principal of his own financial
planning practice since 2003.

Matthew has studied a Bachelor of Commerce degree from Newcastle University majoring in Financial
Accounting and the Diploma of Financial Planning from Deakin University. Matthew is a Registered Tax
Agent and is a member of the National Tax & Accountants Association (NTAA).

Matthew has particular expertise in the areas of retirement planning, superannuation, investments and
insurance. His emphasis is on building a professional, integral and lasting relationship with clients with
the objective of assisting them to achieve their financial and lifestyle goals.

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