How to manage a transition-to-retirement strategy

When you reach your preservation age, your mind naturally turns to the question of how to fund your dream retirement. After all, you’ve worked hard all your life, so you deserve a comfortable lifestyle when it’s time to down tools. But, with some Australians now spending more time in retirement than in the workforce, your nest egg will have to stretch further than ever. So what if there was a way to increase your retirement savings and save on tax while you were still working?

Thanks to a transition-to-retirement (TTR) strategy, there is.

Even better, a TTR strategy gives you financial flexibility – so you can retire on your terms; whether that’s easing into the good life by reducing your hours or working full time for as long as possible.

What’s a transition-to-retirement strategy?

If you are 55 or over, you may be able to access a portion of your super in the form of an income stream while still working. This is known as a TTR pension, and effectively gives you an income from two sources – your employer and your superannuation savings.

This means you can either:

• Wind down your working hours ahead of full-time retirement without reducing your take-home pay
• Pay less tax and boost your super while still working full-time

Using TTR to work less without reducing income

There are many reasons why you might want to take your foot off the pedal when you hit your preservation age. Perhaps you want to spend more time with the family while you still have the energy to run around after the grandkids or maybe you’d like to work on your golf swing? However, if you’re not 100% ready to stop working altogether, a TTR strategy could be for you.

Advantages of using one include:

• Continuing to receive super contributions from your employer – this can help replace the money you withdraw
• Paying less tax (depending on your age) – TTR pension payments are tax-free when you are 60 or older. If you are 55 to 59, the pension payments will be assessed at your marginal tax rate but with a 15% rebate
• You can transition into retirement … literally

However, the biggest downside of drawing down your super early is that you will have less money when you eventually retire.

Using TTR to save on tax and boost your nest egg

One of the biggest benefits of a TTR strategy is its ability to reduce your overall tax position while increasing your retirement funds – a win-win in anyone’s book.

This is because in most cases, income from a TTR pension is taxed more favourably than your salary. At the same time, you also salary sacrifice some of your pre-tax income to top up your super. Salary sacrificed contributions are taxed at 15% – likely less than your marginal tax rate.

Even better, when you turn 60, you don’t have to pay tax on your pension income.

How to start a TTR pension

To start a TTR pension, you need to transfer some of your super out of the accumulation account and into a super-based pension, bearing in mind the following withdrawal restrictions:

• You must have met your preservation age
• You cannot withdraw a lump sum (until you have actually retired)
• You can withdraw up to 10% of your super balance each year
• From 1 July 2021, you must withdraw a minimum amount of 4% of your retirement account balance each year

TTR rules and regulations can be complex and the strategy might not be the right move for your particular situation. For example, if your life insurance is a benefit of your super fund, switching to a TTR pension may terminate your policy.

As such, it’s usually a good idea to get financial advice before you set one up. Additionally, not all super funds accommodate TTR pensions, so you have to check yours does.