Thinking about retirement but not ready to stop working yet?
09 February 2021
Retirement can feel like a very final decision and one which many people are not ready to take immediately. Fortunately, a transition to retirement (TTR) strategy gives you the opportunity to ease into your non-working years without your income taking a hit.
So, what is a transition to retirement strategy what are the benefits and how does it work?
Previously, working Australians could only access their super funds once they reached age 65. However, a transition to retirement strategy allows Australians who have reached their required preservation age to access their super while continuing to work. This in effect presents two options for eligible parties:
- You can reduce your working hours to make them more manageable and supplement your income using a TTR strategy, or
- You can maintain your current working hours, salary sacrifice some of your salary and replace your reduced income using a TTR strategy which potentially reduces annual tax payable.
A transition to retirement strategy can support you working reduced hours, so you are able to spend more time with the ones you love.
When can you access your super?
Generally, you can access your super once you have reached your preservation age, which is between 55 and 60, depending on your date of birth (see the table below). Once you reach this age, you may decide to permanently retire and access your super, or you may decide to continue working and access your super as a transition to retirement (TTR) pension (see the TTR pension section). However, there may be tax implications should you access your super before reaching 60 years of age.
Regardless of whether or not you have retired, if you are aged 65 or over, you can access your super as either a lump sum or income stream.
What is your preservation age?
|Date of birth||Preservation age|
|Before 1 July 1960||55|
|1 July 1960 to 30 June 1961||56|
|1 July 1961 to 30 June 1962||57|
|1 July 1962 to 30 June 1963||58|
|1 July 1963 to 30 June 1964||59|
|After 30 June 1964||60|
How does it work?
If you are younger than 65 when starting a TTR, you can draw between 4% and 10% of your super savings each financial year which must be set up as regular payments rather than receiving a lump sum. For a short period of time the minimum drawdown amount has been halved to 2% due to Covid (from 25 March 2020 until 30 June 2021).
In order to start a TTR pension, you will need to set up an account based pension account alongside your accumulation account. Most super providers offer a pension option which you can easily access. However, if yours does not, you can open a pension account with a separate provider.
Your super savings can then be transferred to the pension account and it is from here that you can withdraw the necessary funds. It is important to retain an active accumulation account, so your employer can continue to make contributions to a superannuation account on your behalf.
If you have second thoughts at any point or your situation changes, you can roll your TTR pension back into your super account (LGS Retirement Scheme members do not have this option).
Retirement Scheme members, please refer to the Retirement Scheme ‘Transition to retirement’ fact sheet which is available from lgsuper.com.au/fact-sheets
How TTR can help to reduce your work hours
Access to some of your super gives you the financial support you may need to reduce your work hours, whilst maintaining your current living standards. By regularly withdrawing from your TTR pension, you can top-up the difference in your salary, so your take home pay remains the same as when you were working fulltime.
A TTR strategy allows you to maintain your current net income level
The benefits of this approach are:
- Your employer is still obligated to contribute to your super fund so you can continue to grow your nest-egg, while easing into retirement.
- It gives you the time to slowly wind down into retirement, rather than an all or nothing approach.
- The ability to supplement your income with your TTR pension means you can maintain your living standards as if you were working fulltime.
It is however worth bearing in mind that this strategy will reduce your overall super amount for when you wish to retire completely.
How to use the TTR to save on tax
Even if you plan to continue working full time, you can still take advantage of the TTR pension if you have reached preservation age. By drawing down on your tax effective TTR pension avails you to surplus income which can, in turn, boost your salary sacrifice contributions. By salary sacrificing, tax payable on income should reduce while you continue to receive a net income level which meets your needs and objectives.
The benefits of this are:
- You may pay less tax on your income as in most cases your pension payments will be tax-free (generally from 60 years of age onwards).
- You may also pay less tax on your super contributions.
- This strategy could give your super savings a boost, so you have more to play with when you retire.
Remember, this strategy requires careful planning and the margins on tax may not make it worthwhile for everybody. It is best to discuss this strategy consideration with a financial planner, prior to taking action.
Talking to a financial planner is the best way to get the TTR strategy to match your retirement goals.
What do you need to consider?
A transition to retirement strategy is a great option for many people, but as with any financial decision, it must be considered carefully before you take action.
Here are several aspects that you consider before proceeding with a TTR strategy:
- Remember your life insurance. TTR pensions do not hold any insurance cover. This means that to keep any insurance, you will need to have enough money in your super account to pay for it. If you have life insurance through super, check to make sure it will not cease with the switch to a TTR strategy.
- What are your social security entitlements? Holding an account based pension may impact your social security entitlements. Make sure to speak to a financial planner if you or your partner receive social security entitlements.
- What are your income needs?
- What is your account type – Accumulation Scheme or Retirement Scheme?
- Do you have an existing binding death nomination that caters for all accounts held?
- Commutations or cash withdrawals are not generally available from a TTR Account Based Pension, for members who have reached preservation age, but are still working.
- You may be able to make commutations and drawdown more than 10% as pension, once you have reached your preservation age and declare permanent retirement, or once you change employers after the age of 60, or when you turn 65, or generally, when you meet an any other condition of release.
- Transfer Balance Cap* - There is a cap on the total amount of super you can transfer into a pension account. This is known as the ‘transfer balance cap’ which from 1 July 2021 is between $1.6 million and $1.7 million. There are penalties for exceeding the cap.
- Contribution caps* - If you have a TTR pension and decide to salary sacrifice, be mindful of contribution caps. Currently, your concessional contributions cap is $25,000 and this includes employer contributions. There are penalties for exceeding the cap.
- Minimum limits for pension drawdown* - From 25 March 2020, the Government temporarily reduced the minimum drawdown requirements by 50% for the 2020-2021 financial year, as part of the government’s response to COVID-19. This applies to members who set up a new TTR pension. These new legislative minimums are set to return to standard rates as of 1 July 2021.
*For further information, please refer to www.ato.gov.au
TTR strategies can be complicated and are not suited to everyone. If you would like to learn more about whether a TTR strategy could be suitable for you, get in touch with an LGS financial planner today.