Work less, boost your super - understand transitioning to retirement

Want to work less hours while fattening up your superannuation? Australia's clever superannuation system offers a Transition to Retirement pension - also called TTR - as a way to facilitate semi-retirement and tax saving before you make the leap to complete retirement.

By Nigel Bowen

Most of us are guilty of barely giving our superannuation a thought as it accumulates - we just assume a chunk of our income gets diverted into this mysterious ‘super account’ that sends us statements in the mail.

We possibly think we might live off this nest egg after we officially 'retire' or withdraw from full time work.

This is broadly correct.

However, as is often the case with superannuation, it's more complicated once you drill down into the details.

People approaching retirement - or what's known by the superannuation fund as 'preservation age' - often want to scale back their work commitments.

There are also plenty of us with super balances that need to be topped up before we hang up the tools.

This is one of the reasons transition-to-retirement pensions, sometimes referred to as a ‘transition-to-retirement income stream’, exist.

How a transition to retirement plan might work for you‍

A TTR pension is likely to be most appealing to those who earn a mid-to-high income and have a conventional superannuation accumulation account.

Low-income earners can choose to set up a TTR, but the tax-saving pay-off is unlikely to be worth the hassle.

On the other hand, there is only so much money high-income earners can now put in (modestly taxed) super accounts. So, once again, the tax savings may not be worth the hassle, especially if you can minimise your tax in other ways.

Chances are you don’t have a self-managed super fund (SMSF) and aren’t a member of a defined benefit superannuation fund (though if you've worked in government, you should check because these can be retirement money pots).

But if you are, be aware that the rules differ for you. (Setting up a TTR should be relatively straightforward if you have an SMSF. Those in defined benefit funds may not be able to set up a TTR pension account at all.

As the name suggests, TTR pensions are aimed at those who have reached ‘preservation age’ (i.e. the age when people can start accessing their super money) but haven’t reached retirement age.

If you were born after mid-1964, your preservation age is 60. If you set up a TTR pension account, it will convert to a ‘standard’ pension account when you meet a ‘condition of release’, such as retiring or turning 65.

Option one: semi-retirement

Money going into or out of super accounts is typically taxed at 15%, and often isn’t taxed at all after somebody reaches preservation age.

In the Australian context, 15% is a low tax rate, and 0% is as low as possible. In contrast, if you’re a full-time worker earning $100,000, you’ll likely pay an average tax rate of around 25%, meaning around $25,000 out of your salary goes to the Australian Tax Office (ATO) each year.

Suppose you’re a full-time worker on $100,000 who halves their working hours (and salary) after turning 60. You’d be paying less tax even if your average tax rate remained constant.

As it turns out, you’re paying much less because your average tax rate has also declined. Thanks to Australia’s progressive income tax system, even with the Medicare levy included, you’re now only paying an average tax rate slightly north of 15%.

That means you can work 2.5 days a week, gross $50,000 and still clear around $42,500.

Even if you’ve paid off your home and (finally) emptied your nest, that may not be enough.

This is where the TTR pension comes in. Suppose you receive an annual (tax-free) pension payment of $33,000. That means you still have an after-tax income of $75,000 but only hand over $8000 in income tax.

For more clarity on your tax position, check the ATO website or speak to your accountant or a financial advisor - it's usually complex, so can be best to get personal advice.

Option two: a fatter super balance

Let’s assume you love your work or want to bulk up your super balance while you still can.

‍Let’s assume you’re a full-time worker earning $100,000. As required, your employer will divert 11% (which is $11,000)of this into your super accumulation account.

Finally, let’s assume you want to get maximum bang for your (low-taxed) super buck, so you ‘salary sacrifice’ another $16,500 to reach the concessional contribution cap of $27,500. (The first $27,500 to go into your super is taxed at the concessional rate of 15%.)  

On the plus side, you’re now paying less in income tax and fattening up your super balance. On the minus side, your pay packet will be notably lighter. But if you’ve set up a TTR pension, you can withdraw money from that to supplement your salary and maintain your standard of living.

Granted, it can seem like you’re robbing Peter to pay Paul by simultaneously upping your super contributions and starting to withdraw some of your super money.

But this should result in a smaller income tax bill – even as you continue to work full time – and a bigger super balance.

Understanding the ins and outs of TTR pensions

‍TTR pensions can be helpful, but they are not silver bullets.

Any money you transfer into a TTR account and spend before retiring will be money that won’t be available to spend after retirement. There are also rules around minimum and maximum withdrawals and they vary depending on your age.

If you now believe a TTR pension might help you achieve your financial or lifestyle goals, it’s a good idea to seek expert advice, from a financial adviser or your super fund, as a first step.

The process for setting up a TTR pension account is straightforward.

You’ll likely be able to find an ‘Open a TTR’ page on your super fund’s website that will allow you to do just that in a matter of minutes.^‍

^‍Just remember that the most important part of the process is transferring money from your standard ‘accumulation’ account to your new TTR account. You’ll need to leave at least $6000 in your accumulation account to keep it classified as an ‘active’ account. Many super funds appear to require at least $20,000 to be transferred for a TTR pension account to be opened.

_{Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.}