Transition to Retirement is a Super and income strategy that’s been around for 15+ years and is still somewhat misunderstood. Here’s how it works:
- If you have achieved Super preservation age, and wish to supplement your income, (or alternatively reduce incomes tax and keep your current net income the same), then Transition to Retirement is a solution that could assist you;
- Currently, many people born earlier than 1965 can currently avail of this strategy, below is a table to assist in determining whether you have met your preservation age or not:
| Date of birth ranges : From | To: | Preservation age |
| 30/06/1960 | 55 | |
| 01/07/1960 | 30/06/1961 | 56 |
| 01/07/1961 | 30/06/1962 | 57 |
| 01/07/1962 | 30/06/1963 | 58 |
| 01/07/1963 | 30/06/1964 | 59 |
| Beyond 1/7/1964 | 60 |
- First step involves using some of your Super to invest in a Transition to Retirement (TTR) Pension.
- Key reason for this is to begin receiving income from the TTR Pension to either replace income if you have gone to less hours, or if you have decided to add extra contributions to Super…more on this later in some examples.
- This income is more attractive from a taxation point of view, and therefore should result in less tax payable all things being equal;
- Whilst under 60, the income received from the TTR pension will attract a 15% tax offset, and after achieving age 60, the income is actually tax-free;
- For those who are considering this strategy as a result of purely a tax saving initiative, this strategy allows you to draw less income from the pension, relative to taxable salary, as the below case study shows;
- For those considering this strategy as a result of moving to less work hours, it may not be purely tax driven, however you may be able to achieve a combination of taxes saved, as well as maintaining your current net income, if needed;
- Other issues to be aware of:
- Minimum pension requirements apply as they do with Account Based Pensions;
- You are not allowed to draw more than 10% of the beginning account balance (1/7 Balance) each year;
- You cannot access lump sums from this pension until you permanently retire;
- It is crucial to seek advice as you are nearing retirement (ie your subsequent condition of release of Super), due to the concept of Super Balance Transfer Cap, and Total Super Balance, which currently sits at $1.7 Million per person. This is due to the fact that without proper monitoring, you could inadvertently trigger the cap if your Pension moves from TTR to Account Based Pension phase.
- Let’s look at some recent client examples of ours:
Case Study 1: Peter is 58* years old, has $890,000 in Super and currently earns $131,000 per annum, and previous to this year, he had been contemplating moving to an 8 day fortnight from full-time work: His income will fall accordingly, however he would like to maintain his current net income, which sits at : $97,450 per year, or just over $8,100 per month. Let’s look at the strategy:
| First year | Prior to Strategy | Post Strategy |
| Pre tax income | $131,000 | $104,800 |
| Transition to Retirement Inc | 0 | $17,800 – minimum pension |
| Total Pre tax income | $131,000 | $122,600 |
| Less Tax | $33,550 | $25,061 |
| After tax income | $97,450 | $97,538 |
| Net Benefit – Tax saved | – | $8,489 and Peter’s average tax rate is now 20.4% where previously it was 23.4% |
*Because Peter is under age 60, he will have some tax to pay on his TTR Pension. In the financial year in which Peter turns 60, it would be prudent for him to delay any TTR pension payments until achieving age 60 in order to avoid tax on the pension in that year.
Case Study 2: Josephine is 60 years old, and currently earns $93,000 per year, and currently contributes $100 per fortnight over her current employer SGC super contributions. Therefore with the 10% SGC from her employer, she currently contributes a total of $11,900 per year. Josephine can save quite a bit of her pay, yet has acquired $375,000 to date in Super. Therefore, she would like to contribute to the maximum allowable Concessional contribution of $27,500 per year, as she only requires income of $5,500 per month, or $66,000 per year to meet her ongoing needs. Let’s see how we can get Josephine’s Super growing, and save tax at the same time:
| First year | Prior to Strategy | Post Strategy |
| Pre tax income | $93,000 | $93,000 |
| Less: Sal Sacrifice per year | $2,600 | $18,200 |
| Transition to Retirement Inc | 0 | $8,000- all tax free * |
| Total Pre tax income | $90,400 | $82,800 |
| Less Tax | $19,847 | $14,777 |
| After tax income | $70,553 | $68,023 – slightly higher than she needs |
| Net Benefit – Tax saved/ contributions gained | – | $5,070, however, inclusive of contributions tax, she is contributing an additional $13,260 per year to Super |
*We could reduce this pension slightly right to the minimum, or choose to commence the TTR pension with slightly less than her current balance, however the additional income per month, may allow Josephine to build up a bit of cash buffer for emergencies.
As you can see there are a few different approaches to this strategy, and we are well equipped at P3 Financial Planning to assist you in your lead up to retirement. Please don’t hesitate to contact us for a free, non-obligatory initial consultation to address whether Transition to Retirement will suit your circumstances.
*Please note* – This is not specific investment advice, it is intended for general guidance only. Should you wish to get specific tailored advice please contact us for an initial, free, non-obligatory appointment with one of our university educated advisers.
