What is a Transition to Retirement Pension?

The Government introduced the TTR rule to allow people near to retirement to access their super without having to retire permanently, provided they invest in an account based pension.

So if you have reached your preservation age (between 55 and 59 depending on when you were born) and still wish to continue working, you can invest in an ACSuper Transition to Retirement (TTR) Pension. To do so, simply tick the Transition to Retirement option in the application form. 

Preservation age 

Who is it suitable for?

The TTR pension is suitable if you are nearing retirement and wish to access your super. Being able to access your super means you can reduce your work hours and use the TTR pension to supplement your reduced work pay. In this way you can wind back your work commitments but maintain your standard of living. 

A TTR pension can also be used within a tax-effective strategy such as salary sacrifice in order to maximise your end benefits for when you eventually retire fully.

How does a TTR Pension work?

A TTR pension works in the same way as a normal account based pension except there are some restrictions, which are:

§         You cannot withdraw lump sums from your pension account (that is, you cannot commute your pension except
     under limited circumstances) 

§         Your pension payments cannot exceed a maximum pension payment limit each financial year. This limit is equal to
     10% of your account balance, and applies until you retire permanently or attain age 65.

What are the key benefits of a TTR Pension?

There are two key benefits of a TTR pension. The first is that you can access your super while you are still working. The second is that you get significant tax concessions.

A TTR pension allows you to access your super while still working. You can work fulltime or part-time; there is no work-test. As you are still working, your employer will continue to contribute to super on your behalf. If you like you can also make additional contributions either from pre-tax money (via salary sacrifice) or from after-tax money by making personal contributions (which, depending on your income, may also qualify you for Government co-contributions).

A TTR pension also allows you to move your super savings from your super fund (e.g. ACSuper) where investment earnings are taxed at 15% to a pension fund (ACSuper Pension) where earnings in your pension account are tax-free. 

If you are over age 60, pension payments are tax-free. If you are between ages 55-59, your pension payments are subject to tax but you can claim a 15% tax offset, which will reduce the overall tax you pay. 

So in summary, the main benefits of a TTR pension are: 

1. You can access your super while still working fulltime or part-time
2. You can receive pension payments to supplement work income
3. You can use your TTR to help boost your super savings
4. You can earn investment returns tax-free.

Key Strategies using TTR Pensions

With a TTR Pension, you can access your super benefits while you are still working. This makes it very effective in retirement planning strategies aimed at boosting super benefits. The two most common strategies are: 

§         Using a TTR pension to reduce your work hours but still maintain the same amount of income

§         Using a TTR pension within a salary sacrifice arrangement to boost super contributions.

Reduce work hours but maintain standard of living 

Many people near to retirement would like to reduce their work hours but are worried that their reduced income will have an adverse effect on their standard of living. With a TTR pension, you can overcome this concern. You can effectively create a situation where you have the best of both worlds: work less without taking a pay cut. Here’s how it works. 

Example:

John is 58 years old and earns $60,000, He decides to wind back his work commitments as a prelude to full retirement in a few year’s time. His employer agrees to keep him on as a part-time worker on a reduced salary. To overcome his reduced take-home pay, John transfers a large sum of his super from the ACSuper fund into an ACSuper Pension and selects the Transition to Retirement option. He leaves a small amount in the ACSuper fund so it is still open to accept contributions. 

With the help of his financial planner and using online calculating tools, John draws an amount of pension from his pension account to match the pay he has forgone due to his reduced work hours. 

By doing so, John’s total net annual income (from his part-time employment plus his ACSuper Pension) is the same as when he was working fulltime.  

As John is under age 60, the pension payments from his ACSuper Pension are subject to tax at his marginal rate but he can claim a 15% tax-offset to reduce his actual tax payable.  

Further, because his super money is now in a pension fund, investment returns added to his account are tax-free (compared to the returns in his super fund which are taxed at up to 15%).  

While John is drawing down on his super savings, he is also adding to it because, as an employed worker, his employer will continue to make Superannuation Guarantee (SG) contributions on his behalf at a rate of 9% of earnings. In addition, by taking a TTR, John is also able to boost his super using a salary sacrifice strategy or through personal contributions. 

Once John turns 60, his pension payments are tax-free. This provides further income tax savings. 

When John eventually retires for good, he can withdraw the balance from his pension account as he would then have satisfied a condition of release. He can do what he wants with this money; perhaps even take out another ACSuper Pension to continue to receive tax-effective income. 

Reduce work hours but maintain same income: 

Points to note about this strategy:

§         Pension payments from an account based pension are tax-free for recipients age 60 and over.
     If under age 60 and over your preservation age (55 to 59) payments are subject to tax at marginal
     rates but you can claim a 15% tax offset.

§         By accessing your super before you retire permanently, you run the risk of eroding your super savings,
     so it’s wise to boost ongoing contributions to your super fund by using a salary sacrifice strategy.

§         You must take a minimum pension limit and cannot exceed a maximum pension limit each tax year.

§         You cannot withdraw lump sums from a TTR pension account (except in special case)

§         You can convert your TTR pension to a regular account based pension when you retire permanently or
     meet another condition of release.

Using a salary sacrifice/TTR Pension strategy 

One of the risks of drawing down your super by using a TTR pension is the potential to deplete your super savings. This risk can be offset with tax-free earnings in your pension account and the continued SG contributions made by your employer. 

However, there is a way in which you can use a TTR Pension to boost your super savings before your retire permanently – and that is by way of salary sacrifice. 

Salary sacrifice is a proven tax-effective strategy aimed at saving income tax.  It involves getting your employer to put into super what they would otherwise pay you in cash. You sacrifice salary in exchange for super contributions. Beware though that not all employers offer salary sacrifice to their employees, so discuss with your employer first. 

Here’s how a salary sacrifice/TTR Pension strategy works.  

Example: 

Molly, 57, plans to continue working fulltime for the next three years before retiring for good. She earns $60,000 and wants to maximise her super savings, which is currently worth $150,000.  

After consulting with her financial planner, Molly decides to roll over a portion of her super from her ACSuper fund into an ACSuper Pension and, because she is still working, she selects the Transition to Retirement option. She then agrees with her employer to sacrifice $17,500 of her salary in return for before-tax contributions to super. 

Molly now receives a lower work pay but because she has started a TTR pension, she can make up for this reduced income by drawing a suitable amount of pension payment from her account (same approach as used by John).  

In fact, as the table below shows, with careful planning, Molly ends up with the same net income even though she has sacrificed a considerable amount to super. 

The amount of pay she sacrifices goes straight into her super fund as a ‘before-tax’ contribution, which adds considerably to her super savings. Investment returns added to her pension account are tax-free, which means her money can potential grow faster. 

Molly also ends up paying less income tax because her taxable income has been reduced.

Using salary sacrifice and a TTR pension to boost super: 

Points to note about this strategy:

§         If you are working as an employee you are entitled to receive your employer’s SG contributions
     of 9% of your earnings

§         You save tax by reducing taxable income. At the highest rate of income tax, almost half (46.5 cents)
     of every dollar in pay would be lost in tax

§         Investment returns in a pension fund are tax-free.

§         Pension payments from an account based pension are tax-free for recipients age 60 and over.
     If under age 60 and over your preservation age (55 to 59) payments are subject to tax at marginal
     rates but you can claim a 15% tax offset.

§         With a TTR pension, you must take a minimum pension limit and cannot exceed a maximum pension limit
     each tax year.

§         You cannot withdraw lump sums from a TTR pension account unless you have unrestricted component
     in your account.

§         You can convert your TTR pension to a regular account based pension when you retire permanently or 
     meet another condition of release.

§         There are limits to how much you can contribute to super each year. The ‘cap’ for concessional contributions
     (which include salary sacrifice amounts) in tax year 2010/11 is $50,000 pa if you are over age 50 and $25,000 pa
     if under age 50. For 2011/12 tax year, the cap is $25,000 if you are over age 50 and have $500,000 or more in super.