A guide to the transition to retirement strategy

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A guide to the transition to retirement strategy

Dec 11

The transition-to-retirement (TTR) strategy allows individuals who have reached their preservation age (currently 55) to access their preserved superannuation in the form of a non-commutable income stream, known as a transition-to-retirement income stream.

A TTR income stream can be used to top up an individual’s cash-flow where they choose to reduce their working hours as they near retirement, cease employment without committing to retirement, or where they just require extra cash-flow.

In addition, where the individual wishes to remain in full-time employment, a TTR pension used in conjunction with salary sacrifice can be a tax effective way of increasing their superannuation savings.

The most popular type of income stream used for a TTR strategy is the non-commutable account-based pension (NCABP).

The main characteristics of the NCABP are:

Individuals are permitted to draw up to 10 per cent per annum of the account balance as at 1 July or 10 per cent of the purchase price in Year 1. Lump sum withdrawals are generally prohibited.
When the individual meets another condition of release with nil cashing restrictions (for example, once they attain age 65), they have the option of increasing pension payments above 10 per cent per annum and making lump sum capital withdrawals.
For individuals below age 60, the taxable portion of pension payments is taxed at their marginal tax rate, with a tax rebate of 15 per cent available on the taxed element. Payments funded from the tax-free superannuation component are received tax-free.
For individuals aged 60 and over, pension payments are tax-free unless a part or all of their superannuation benefits consist of an untaxed element.
Contributions cannot be made to a pension account.
The pension account can be rolled back to accumulation phase at anytime.
Investment earnings or capital gains generated from the assets supporting the income stream are not taxed regardless of an individual’s age and the type of asset.
A minimum pension must be drawn each year. When purchased part-way through a year, a pro-rata minimum is payable based on the number of days remaining in the financial year. No minimum payment is required in the year of death.
The account balance is influenced by the investment earning rate and the level of pension and capital drawings.
The pensioner may make a death benefit nomination.
Pension payments received are concessionally assessed by Centrelink, as the amount counted towards the income test is reduced by the Centrelink deductible amount.
SMSF members must ensure the trust deed allows a TTR pension to be paid from the SMSF before commencing one.
Where a TTR pension is commenced with both unrestricted non-preserved (UNP) and preserved benefits, payments are taken from the UNP benefits first, which reduces the amount of accessible benefits. In addition, the earnings within a TTR pension accrue to preserved benefits, unlike a standard account-based pension where earnings accrue to UNP benefits.

A key benefit of a TTR strategy is that it can allow an individual to save more towards their retirement without having to forgo net income. This comes about from the combination of:

Switching superannuation assets from the 15 per cent tax environment to the tax-free environment;
Personal income tax savings derived from the receipt of a pension rebate (if under age 60) or tax-free income stream (from age 60); and
The fact that salary sacrifice contributions are only being taxed at a maximum of 15 per cent in comparison to an individual’s marginal tax rate plus Medicare Levy.

Work less by using your super

These days many Australians are continuing to stay in the workforce for longer, on a part-time basis. More than two in five Australians who work full time and intend to retire are looking to reduce their hours first¹. The good news is that you can use your super to provide an income stream to make the transition and set a retirement date that suits you.

The following example shows how a transition to retirement strategy can help reduce working hours. Keep in mind that your personal situation will be different, so you may have different results.

David’s story

David, age 57, needs to cut back his working hours due to health reasons, and he cannot afford to retire.

He has looked at reducing his workload from 35 hours a week down to 25 hours which will reduce his salary from $75,000 to $53,500. David has $250,000 (all taxable component) accumulated in his superannuation account.

By using a TTR allocated pension, David finds he can maintain his annual income and work fewer hours. Let’s look at the impact that David’s partial retirement will have on his income position:

Using TTR to meet income needs

	Before	After
Salary	$75,000	$ 53,500
TTR Allocated Pension	–	$ 17,519
Gross Assessable Income	$75,000	$71,019
Income Tax	($17,047)	($13,066)
Take home pay	$57,953	$57,953

As you can see, by using a TTR strategy, David has been able to keep his after-tax income at the same levels, despite reducing his work hours. It does however come at a price – David’s superannuation account balance will reduce over time as he continues to draw down pension payments.

This example is illustrative only and is not an estimate of the returns or benefits you will receive or taxes, fees and costs you will incur. The figures are in respect of the financial year ending 30 June 2014 and are based on applicable pension drawdown limits and tax rates for the 2013-2014 financial year.

1. Australian Bureau of Statistics

What you need to know

Any advice in this page is general in nature and is provided by AMP Life Limited ABN 84 079 300 379 (AMP Life). The advice does not take into account your personal objectives, financial situation or needs. Therefore, before acting on this advice, you should consider the appropriateness of this advice having regard to those matters and consider the Product Disclosure Statement before making a decision about the product.

A guide to the transition to retirement strategy

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