What is a transition to retirement pension?

After reaching the preservation age for your superannuation, you may decide to stop working and instead use money from your superannuation account to fund your lifestyle. Your preservation age is generally the age you have to be to withdraw from your super as income. But for those who don’t want to completely quit the workforce, and are under the age of 65, there is another option to consider: A ‘transition to retirement’ income stream (TTRIS).

This would allow you to work less while potentially earning 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.

What is a ‘transition to retirement’ pension?

A transition to retirement (TTR) pension or income stream is where a superannuation fund pays a semi-retired fund member a portion from their superannuation balance periodically—similar to a pension—to top up their income.

Under the current transition to retirement rules, once you reach your superannuation preservation age and if 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 from their super savings. Transition to retirement pensions are often called ‘non-commutable’ income streams, according to the Australian Tax Office (ATO), due to being unable to access this lump sum. TTR pensions can be a way for people who have reached their preservation age, but are not 65 years of age, 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 worth contacting your super fund, and/or seeking out independent professional financial advice, before making a decision about retirement and superannuation income streams.

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What is a superannuation income stream?

A superannuation income stream is a series of periodic payments to an eligible super fund member. 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 fund will release their money:

1. Lump-sum payment—a one-off payment, which can be all of the super savings in a fund account, or a portion 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 these different payment methods, such as taking a portion of your super savings in a lump sum but then also opting for an income stream.

What age can I start a transition to retirement pension?

You cannot start a transition to retirement pension 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. This age does not apply when accessing your super early due to financial hardship or on compassionate grounds.

The preservation age will depend on when you were born and is set by the Australian Government.

The preservation age in Australia, as is listed by the ATO, is:
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Learn more: 5 practical steps to start your retirement planning

How does a transition to retirement pension work?

Different super funds may have different ways of setting up a transition to retirement pension or income stream, so it could be worth contacting your super fund directly 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-based pension or allocated pension account or something similar (depending on what term the super fund uses).

The transition to retirement 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 transition to retirement rules and the wishes of the person to whom the pension will be paid.

The person who is receiving the pension will need to retain a regular ‘accumulation’ superannuation account, which is where the super guarantee (SG) contributions from your employer are paid.

How much will my payments be under a transition to retirement pension?

How much a person is paid under a TTR pension or income stream 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 that you can transfer from your super account to the account which will be used for your transition to retirement pension, which is currently 10% of your total superannuation account balance. This cap applies to TTR pensions which are not in the retirement phase.

‘Retirement phase’ generally means that the person receiving the TTR pension has retired, has reached age 65 or has put their super funds into a ‘retirement phase’ account. Check with your super fund to find out their definition of ‘retirement phase’, as it could impact aspects such as tax and the amount that can be paid.

A minimum withdrawal rate also applies to TTR income streams. The federal government has returned the rate to a 4% minimum, after several years at 2%. The amount changes according to age group.

Minimum yearly withdrawal amounts by age

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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 transition to retirement pension or income stream.

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

Possible transition to retirement pension benefits

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 some of the possible benefits in further detail:

1. Top-up your income

A TTR strategy means that even though you may want to reduce the amount of hours you work, the TTR payments can help to supplement your income so you can afford to maintain your lifestyle. This could assist you in transitioning 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 have to pay tax on a TTR income stream. This 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 will get a 15% tax offset at the time of writing. 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 tax implications.

4. Help ease into retirement

For some, the idea of ceasing work completely could be daunting. A TTR pension could allow for a more gentle transition into retirement, especially if you remain in the same job and gradually reduce your work hours. The transition to retirement pension can also help you maintain your finances, without having to make changes to your current lifestyle.

Possible transition to retirement disadvantages

There are a range of potential disadvantages to consider with a transition to retirement 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 have 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 states that anyone applying for government benefits must pass an income test, which is done by assessing you and your partner’s income, which can include financial assets such as superannuation. It adds that pensions have income and asset limits, and if you’re over these limits, you’ll more than likely get a lower pension.

3. May impact life insurance

If you have life insurance through your super, it can be worth checking to see if your cover reduces or stops if you start a TTR pension. It could be a good 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.

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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 when it comes time for you to fully retire.

Having a TTR pension is not a guarantee, as 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.

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Transition to retirement arrangements and tax

Any withdrawals from your transition to retirement pension or income stream you make before the age of 60 will be taxed at your marginal tax rate, but will also attract a 15% tax offset at the time of writing. 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 will be tax free. The ATO recommends that anyone considering setting up such a pension should get professional financial advice beforehand.

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:

• Whether or not your super fund accommodates a TTR pension, as some do not.

• How much income you would ideally need in this phase of your life, as well as in the future.

• The impact on any of your current or future government entitlements e.g. age pension.

• Whether any life insurance cover you may have through your super fund will be affected.

• 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.

• If your super balance is 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 and allow more time for your fund’s asset investments to earn money.

• How long your current super balance will last once you retire.

• 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 transition to retirement pension or income stream.

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.

Read More: Superannuation and retirement planner calculator

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