Starting your transition to retirement
Transition to retirement income streams (or pensions) allows you to gradually draw on your super benefits while you’re still working and moving towards your retirement. There are different ways that you can use a TTR income stream. For example, you can choose to:
- Work fewer hours and use a TTR pension to supplement your income.
- Salary sacrifice some of your salaries into super so you can save tax and use a TTR pension to increase your income or boost your retirement savings.
In order to be eligible to start your transition to retirement pension, you must have reached your preservation age, which is between 55 and 60 depending on your date of birth.
What are the rules for starting a TTR?
Firstly, your super fund must be an accumulation fund to enable you to start a TTR pension, it can’t be a defined benefit fund. Only about 10% of Australians are members of defined benefit funds. Your adviser starts a TTR pension by transferring some of your super funds from your accumulation account into your pension account. Most super funds offer a pension account, but if your fund doesn’t, you can start a pension account with a fund that does.
You must leave at least a small balance in your accumulation account when you set up your TTR pension account. Your accumulation account needs to remain open to receive your employer’s compulsory 9.5% super guarantee contributions or any voluntary contributions that you may want to make (such as salary sacrifice arrangements). The investment earnings in both your accumulation and pension accounts are taxed at 15%.
You must withdraw a minimum of 4% of your pension account balance each year if you’re aged under 65 and you can withdraw a maximum of 10%. Note that there are different minimum pension payment percentages once you are over the age of 65. At least one withdrawal must be made each year and your pension can only be transferred to another person in the event of your death.
If you’re aged 65 and over, there are no restrictions on the amount of super you can withdraw as you’ve met a legal condition of release even if you’re still working.
What are the benefits?
They enable you to:
- Ease into retirement by helping you to maintain your income and lifestyle.
- Continue to make contributions to your accumulation account (or have them made by your employer).
- Receive tax-free pension payments (if you’re aged over 60).
- Grow your super and save tax via salary sacrificing. If you salary sacrifice into super, your contributions are taxed at the concessional rate of 15%, up to a cap (currently $25,000 per year). This can be a good strategy for middle and high-income earners!
How do you stop a transition to retirement pension?
A TTR pension automatically converts to an account-based pension when you meet a superannuation condition of release (such as retiring from the workforce or reaching the age of 65). When your TTR pension becomes an account-based pension, you’ll be entitled to tax-free investment earnings and you’ll no longer have any withdrawal restrictions.
You can also transfer your pension account funds back into your accumulation account at any time. You must still have made the minimum 4% withdrawal (if you are aged under 65) in the financial year that you wish to cease your TTR pension.
Whilst a TTR won’t suit everyone, there are tremendous potential benefits, especially for middle- and high-income earners.
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