How does a transition to retirement (TTR) pension work?

Thinking about retiring but worried about stopping work completely? This is where a transition to retirement (TTR) pension from your superannuation fund, known as a transition to retirement income stream (TRIS), may help.

After reaching retirement age, you may decide to stop working and instead use money from your superannuation account to fund your lifestyle. But for those who don’t want to completely quit the workforce, and are aged under 65 years of age, there is another option to consider: A ‘transition to retirement’ income stream.

This would allow you to potentially earn a similar weekly amount by collecting a reduced wage from your existing job and topping it up via a ‘pension’ from your super account. It allows eligible super fund members to withdraw up to 10% of their super each year under certain conditions.

We take a look at what this arrangement means, when you could access it and how it could work.

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What is a transition to retirement pension?

A Transition to Retirement (TTR) income stream or pension is where a superannuation fund pays a semi-retired fund member a portion of their super funds periodically – similar to a pension – to top up their income.

Under the current TTR rules, once you reach your superannuation preservation age and your fund allows it, you can:

• stay in your current job
• reduce the number of hours you work
• supplement your income by accessing a limited amount of super, divided into periodic payments.

A TTR pension differs from other mechanisms for accessing super, as it does not allow a person to receive a lump-sum payment of their super savings. This type of income stream is called a ‘non-commutable’ income stream, according to the Australian Tax Office (ATO). It is a way for people who have reached their preservation age, but not age 65, to access their super without having to retire.

According to the Australian Government’s Moneysmart website, setting up a TTR strategy “can be complicated”. It could be a wise idea to talk to your super fund, and/or seek out independent financial advice, before making a decision about retirement and superannuation payment arrangements.

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What is a superannuation income stream?

A superannuation income stream, also described as a super pension or annuity, is a series of periodic payments to a super fund member, according to the ATO. How a person can access the money held on their behalf in a superannuation fund depends on the rules of that fund.

However, when a super fund member reaches their preservation age, there are generally two main ways in which a super fund will release money to a member:

1. Lump-sum payment – a one-off payment of a sum of money, which can be all of the super savings in a fund account, or a potion of it.
2. Super income stream -– where a super fund pays a member a portion of their super savings periodically, such as monthly. Popular examples of super income streams are account-based pensions and annuities.

It is also possible to receive funds in a combination of those payment methods, such as taking a portion of your super savings in a lump sum but then also opting for an income stream.

→ Learn more: A guide to superannuation income streams

What age can I start a TTR pension? What does preservation age mean?

You cannot start a TTR arrangement until you reach your ‘preservation age’. The term preservation age means the age which you need to be before you can access the funds in your superannuation account as income (without applying for access due to financial hardship).

This age depends on when you were born and is set by the Australian Government.

The preservation age in Australia, as is listed by the ATO, is:

• 55 if you were born before 1 July 1960
• 56 if you were born between 1 July 1960 and 30 June 1961
• 57 if you were born between 1 July 1961  and 30 June 1962
• 58 if you were born between 1 July 1962 and 30 June 1963
• 59 if you were born between 1 July 1963 and 30 June 1964
• 60 if you were born on or after 1 July 1964.

→ Learn more: 6 questions to ask when planning for retirement

How does a transition to retirement pension work?

Different super funds may have different ways of setting up a TTR pension or TRIS, so it could be a wise idea to talk to your super fund if you are considering this option.

Generally speaking, however, a portion of the balance of your super fund is transferred into a separate account called a pension account, account-based pension account, allocated pension account or similar (depending on what term the super fund uses).

The TTR pension is then paid from this account to the recipient’s bank account, in regular payments at regular intervals, as set by the super fund’s rules and the wishes of the person to whom the pension will be paid.

The person who is receiving the TTR pension will need to retain an ‘accumulation’ superannuation account, which is where the super contributions from your employer are paid.

For example, in this hypothetical scenario:

Sam, who was born on 3 January, 1960, decides he would like to start cutting down on his work and ease into retirement.

He talks to his employer, and they agree that he can cut his hours down, reducing his work week to four days instead of five.

Because he has reached his preservation age, he talks to his super fund about setting up a Transition to Retirement income stream.

He transfers a portion of his savings into a TTR pension account that his fund has set up for him.

Every month, a set amount of money is transferred from this TTR account to his savings account.

He still receives his wage from his job, but this extra money from the TTR pension helps to top up his income.

It’s important to note that there could be tax implications from receiving a TTR pension, which we cover in more detail soon.

How much will my payments be under a TTR pension?

How much a person is paid under a TTR pension or TRIS depends on a number of factors, including the balance of their super account, their age, how much money that person wishes to be paid, the rules of their super fund and taxation considerations.

The ATO says that there is a cap on the amount of money per year that can be paid to a person who is on a TTR pension, stating: “A maximum amount of 10% of your account balance applies for transition to retirement pensions which are not in retirement phase.”

A minimum withdrawal rate also applies. The federal government temporarily reduced this minimum to 2% (for those aged under 65) for the 2020/1, 2021/22, and 2022/23 financial years. At the time of publication, the rate was expected to return to a 4% minimum from 1 July 2023. The amount changes according to age group.

Minimum yearly withdrawal amounts by age

Who is eligible for a transition to retirement pension?

Anyone who has reached their preservation age, is still working and who has an eligible superannuation account could apply to set up a TTR pension or TRIS.

If you have any questions about your eligibility for a TTR pension or TRIS, you may want to seek professional financial advice to assist you in considering your options. The ATO recommends seeking financial advice when considering your super withdrawal options, as well as how tax will apply to your retirement, TTR pension or superannuation income streams.

Transition to retirement pensions: pros and cons

There are potential advantages and disadvantages to a TTR pension or TRIS. A TTR pension may help you top up your income if you want to semi-retire while still receiving super contributions.

Plus, it could help you ease into retirement. It could impact your pension and life insurance though, and reduce the overall balance of your super account at retirement. Plus, you could need to renegotiate your work schedule with your employer.

We consider these different factors in more detail.

What are the possible benefits of a TTR pension?

According to Moneysmart, if you’ve reached your preservation age and are still working, you can use a TTR strategy to:

• supplement your income while reducing the hours you work
• boost your super and save on tax while working full-time.

Here, we explain possible benefits in some further detail.

1. Top-up your income

A TTR strategy means that even though you may want to reduce the amount of hours that you work, the TTR payments will help to supplement your income so you can afford to maintain your lifestyle. This could help you to more comfortably transition into retirement, as you can adjust your daily routine gradually, and ease yourself into a non-working lifestyle.

2. Boost your super

Staying employed also means that your employer will still be contributing to your super fund, increasing your account’s balance – even while you are drawing some funds out of it. This could help to offset the impact of the income stream that is being paid to you.

3. Save on tax

According to Moneysmart, anyone aged 60 or older does not pay tax on a TTR income stream, and the strategy of using a TTR pension to save on tax works best if you are 60 or older and a mid- to upper-income earner. Those aged 55–59 are taxed on payments at their usual marginal rate, “but you get a 15% tax offset”, the site states. Earnings from investments within TTR accounts could also be taxed less than other types of investments. The ATO recommends that anyone considering a TTR income stream could benefit from seeking professional advice when it comes to the taxation implications.

4. Help ease into retirement

For some, the idea of ceasing work completely could be a daunting or unpalatable option. A TTR pension could allow a more gentle transition into retirement, allowing a person to remain in the same job and gradually reduce their work hours, while having the finances to maintain their lifestyle.

What are the possible disadvantages of a TTR pension?

There are be a range of potential disadvantages to consider with a TTR pension. As well as employment concerns, it may impact your government pension and life insurance, and reduce the balance of your super. Here, we explain these possible disadvantages in some further detail:

1. Employment concerns

In order to be able to receive a TTR income stream, you must remain in your current job, and also reduce your working hours. This means that you will most likely need to negotiate a new working schedule with your employer. If you do not wish to notify your employer that you are thinking about retirement, this could potentially be a tricky situation to navigate.

2. May impact any government pension

According to Moneysmart, any payments a person – or that person’s partner or dependants – receives could impact what government benefits are paid to them, such as the Age Pension or Carer Payment. Services Australia, which manages government pensions, states that anyone applying for assistance must pass an income test. The agency states that they “assess your and your partner’s income from all sources”, including “financial assets such as superannuation”. It adds that pensions have income and asset limits, and “if you’re over these limits, you get a lower pension”.

3. May impact life insurance

Moneysmart advises that if you have life insurance with your super, it’s a good idea to “check if your cover reduces or stops if you start a TTR pension”. It could be a wise idea to ask your insurance providers about what effect taking a TTR pension may have on other types of insurance, too, such as income protection insurance.

4. Reduces the balance of your super

Removing money from an accumulation superannuation account means that the balance of that account will fall, which could impact its potential earnings over time. While you could receive investment income on the account-based pension, it may not be at the same performance level as the other, presumably larger account. This could lower the amount of money you have in your superannuation account at the time of your full retirement.

Super fund MLC warns that your TTR pension is not guaranteed, because pension payments can only be made while there are funds in your account. Having poor investment returns or drawing your income too fast could both cause your pension income to reduce or cease.

Transition to retirement arrangements and tax

Moneysmart advises that any withdrawals you make before the age of 60 will be taxed at your marginal tax rate, but also attract a 15% tax offset. The site outlines that once you reach the age of 60, all withdrawals made are generally tax-free.

Investment earnings within your super account are taxed at up to 15% (the maximum rate). Once you turn 65 or meet a condition of release, your TTR investment earnings will enter the retirement phase and your investment earnings are tax free.

The ATO recommends that anyone considering setting up such a pension should get professional financial advice.

What should I consider before transitioning to retirement?

Before you decide to cut back on your work hours and begin a TTR pension or TRIS, here’s some of the things you should consider.

1. Whether or not your super fund accommodates a TTR pension (some don’t).
2. How much income you would ideally need in this phase of your life, as well as in the future.
3. The impact on any government entitlements.
4. Whether life insurance you may have through your super fund will be affected.
5. Whether or not you’d prefer to continue working full-time until retirement age and retire outright with an account-based pension, rather than transitioning with a TTR pension.
6. Your super balance: if it’s on the lower side, you might want to consider leaving it alone for a while so you can:
   • contribute more to it before you start withdrawing from it.
   • allow more time for your fund’s asset investments to earn money.
7. How long your current super balance will last once you retire.
8. Whether or not you need a TTR pension. If you’ve hit retirement age, you can already access your super, so you may not need to use a TTR strategy.

It’s also important to remember setting up a TTR pension will potentially result in less money in retirement through your super, which could influence your lifestyle when you retire permanently.

Learn more: Superannuation and Retirement Planner Calculator

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