Wondering about the best way to ease into your retirement years? A transition-to-retirement strategy may be the answer, but it’s important to know that the rules have recently changed. Here’s the lowdown.
These days, there are all sorts of pathways to retirement. As more Australians choose to wind down gradually from their careers, it’s becoming increasingly common to move to part-time hours before leaving the workforce altogether. Other pre-retirees prefer to use their last few years of earning a regular income as an opportunity to give their nest egg a final boost.
Since 2005, Australians who have reached their ‘preservation age’ have been using transition-to-retirement (TTR) strategies to take advantage of tax savings when they start accessing their super. But with recent changes to super rules from 1 July 2017, are TTR strategies still as rewarding as before?
How does a TTR strategy work?
In a nutshell, a TTR strategy involves drawing a transition to retirement pension from your super while you’re still working. To set it up, you transfer part of your super into a pension account. Then, you have to withdraw between 4% and 10% of the balance each financial year.
When can I start one?
While you’re still working, you can start drawing a TTR pension from your super as soon as you’ve reached your ‘preservation age’. This could be anywhere from 55 to 60 years old, depending on your date of birth. Check the Australian Taxation Office (ATO) website for details.
But remember, if you’ve already fully retired after satisfying a condition of release or turned 65, then you don’t need to set up a TTR pension to access your super. You can simply take out a lump sum or begin drawing a regular income stream from your super to fund your retirement.
What are the benefits?
Starting a TTR pension means you can work fewer hours but still have the same amount of money coming in, with your pension payments supplementing your reduced income.
Alternatively, you can keep working full time while salary sacrificing part of your pre-tax earnings into super. Again in this case, your TTR pension helps make up the shortfall in your take-home pay.
This was once a particularly tax-effective strategy, but new rules around the tax treatment of TTR pensions have made this a less attractive option for many pre-retirees.
Until 30 June 2017, all investment earnings on super assets supporting TTR pensions were tax-free – but this is no longer the case. Legislation was passed in late 2016 to remove the tax-exempt status of TTR pensions, with this rule coming into effect on 1 July 2017. From that time, investment earnings on TTR pensions (including those commenced prior to 1 July 2017) are taxed at up to 15% – the same tax treatment that applies to your super while in the accumulation phase 1.
This change means that TTR strategies will generally become less beneficial, although they can still be worthwhile in many situations, depending on your circumstances.
Importantly, there are no changes to the tax treatment of TTR pension payments 2. If you’re aged 60 or over, your payments are tax free. If you’re between preservation age and 59, then the taxable component of your pension payments will be taxed at your marginal tax rate. On a positive note, you’re eligible for a 15% offset to reduce the tax you pay on this component.
Is a TTR strategy right for me?
If you already have a TTR strategy underway, or you’re thinking of starting one soon, check with your financial adviser to see if it’s still the best option for you. And since a TTR strategy may involve chipping away at your retirement savings, your financial adviser can help work out how much you can draw down so you’ll still have enough super to last the rest of your life.
1 Once you reach age 65, or notify your super fund that you’ve met another eligible condition of release (retirement, terminal medical condition, permanent incapacity), your TTR pension becomes a retirement phase income stream and earnings on assets supporting your pension become tax free.
2 The tax treatment discussed assumes you are a member of a taxed superannuation fund (most funds)