Is a Transition to Retirement strategy (TTR) still worth it?

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As at February 2017, if you receive a transition to retirement pension, the fund receives tax free earnings on the super assets that support it. From 1 July 2017, earnings from assets in a transition to retirement pension will be taxed at 15% regardless of the date it commenced.

 What is a transition to retirement strategy?

Depending on your age, you may be able to access your super while you are still in the workforce, in the form of a transition to retirement pension (TTR Pension). Transition to retirement pensions are only available when you reach preservation age. That’s the age at which, by law, you can access your super. Australians born on or after 1 June 1964 won’t reach preservation age until age 60. You can find out your preservation age at:

https://www.ato.gov.au/Individuals/Super/Accessing-your-super/

 Who can benefit from these strategies?

A transition to retirement strategy may be suitable if you are over your preservation age and:

  • You want to supplement your income
  • You would like to boost your super savings and pay less tax
  • You would like to draw down on your super to pay down debts such as your mortgage

 How does it work?

If you are under age 65 and still working, you can transfer the sum of your super to a super pension (referred to as a TTR pension) and withdraw between 4% and 10% of your pension account balance each financial year. The retirement income account provides you with regular payments, giving you the flexibility to either reduce your hours at work, or if your employer allows salary sacrifice, you could contribute some of your pre-tax income to your super and use payments from your income account to top up your salary. You cannot withdraw money as a lump sum.

 Benefits of a TTR Strategy

Some of the benefits of this strategy include: 

  1. Boosting up your super savings
    Your super balance will keep growing as your employer continues to make contributions into your super account. Salary sacrificing some of your pre-tax income into your super will further boost your super savings.
  2. Paying less tax
    Employer contributions and salary sacrificed contributions are taxed at a low rate when they go into super. This is likely to be lower than your marginal tax rate.
    When you turn 60, you won't pay any tax on your pension income. Even if you are under age 60 you will get a tax rebate on your pension income.
  3. Easing into retirement
    If you want to reduce your work hours as a way of easing into retirement, taking a TTR pension from your super fund can supplement your employment income if it's not quite enough to maintain your current lifestyle. You may be able to work fewer hours to maintain your health, make a career switch, or a sea change.

Source: https://www.moneysmart.gov.au/superannuation-and-retirement/income-sources-in-retirement/income-from-super/transition-to-retirement

 Tax on TTR pensions is changing from 1 July 2017

Currently, if you receive a TTR Pension the fund receives tax free earnings on the super assets that support it. From 1 July 2017, the government will remove the tax-exempt status of earnings from assets that support a TTR Pension. Earnings from assets supporting a TTR Pension will be taxed at 15% regardless of the date that it commenced. You will also no longer be able to treat super income stream payments as lump sums for taxation purposes.

The intent of this change is to ensure that TTR Pensions are not accessed primarily for tax purposes but for the purpose of supporting individuals who remain in the workforce.

If you are over 60, your pension payments are still tax free after 1 July 2017. However, earnings within the fund will be taxable at 15%, compared to 0% before 1 July 2017.

Source: https://www.ato.gov.au/individuals/super/super-changes/?utm_campaign=newmeasuresa&utm_source=external_site&utm_medium=web#income_stream_products

 Is a TTR strategy still worthwhile after 1 July 2017?

Even though there will be a reduced tax benefit from 1 July 2017, keeping or starting a new TTR Pension may still make sense if you are:

  • transitioning from full-time employment to part-time work and require a pension payment from your super fund to supplement your income.
  • over age 60 and salary-sacrificing employer super contributions into your super fund and drawing a TTR pension to replace income lost through salary sacrifice.
  • Under age 60 and have mainly tax free-component super benefits in your fund, as the majority of your pension payments would be tax free.
  • Using the income from a TTR pension to pay down debts such as a mortgage.

 In some circumstances, however, it could make sense to close your TTR Pension and roll the funds back into your accumulation super fund. If you are considering this it is important to get some advice before making the move.  A transition to retirement strategy may sound straightforward to some, but there are key aspects of a transition to retirement pension that require financial advice. If you would like to review your current TTR Pension strategy, or consider setting up one please contact us on 07 3812 7122.

Any general tax information provided in this publication is intended as a guide only and is based on our general understanding of taxation laws. It is not intended to be a substitute for specialised taxation advice or an assessment of your liabilities, obligations or claim entitlements that arise, or could arise, under taxation law, and we recommend you consult with a registered tax agent.