How Transitioning to Retirement Works

Digital Editor · 24 March 2021
Thinking about retiring but worried about stopping work completely? This is where a Transition to Retirement income stream from your superannuation fund may help. We take a look at what this arrangement means, when you could access it and how it could work.

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 instead reduce their hours of work, there is another option to consider: A “transition to retirement” (TTR) income stream. This would allow you to still earn a wage from your existing job while drawing on some of your super. In this article, we cover:

What is Transition to Retirement?

A Transition to Retirement (TTR) income stream 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 Transition to Retirement (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

TTR 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).

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

Here are some terms that are useful to know before delving into this topic:

What does preservation age mean?

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 Australian Tax Office (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.

What is a Superannuation Income Stream?

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:

  • 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.
  • 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.

How does a Transition to Retirement (TTR) pension work?

Different super funds may have different ways of setting up a Transition to Retirement income stream, 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:

  1. Sam, who was born on 3 January, 1960, decides he would like to start cutting down on his work and ease into retirement.
  2. 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.
  3. Because he has reached his preservation age, he talks to his super fund about setting up a Transition to Retirement income stream.
  4. He transfers a portion of his savings into a TTR pension account that his fund has set up for him.
  5. Every month, a set amount of money is transferred from this TTR account to his savings account.
  6. 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 Transition to Retirement 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 states 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: “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, typically 4%. However, the Federal Government temporarily reduced this minimum to 2% for the 2020/21 financial year. At the time of publication, the rate was expected to return to a 4% minimum from 1 July, 2021.

“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.

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 income stream.

If you have any questions about your eligibility for a TTR pension, you may want to seek professional financial advice to assist you in considering your options. The ATO states: “When considering the tax aspects of retirement, transition to retirement or superannuation income streams, we recommend you seek financial advice to find out what is best for you.”

What are the possible advantages and disadvantages of a Transition to Retirement pension arrangement?

What are the possible pros of a TTR pension?

According to the Australian Government’s Moneysmart website, the TTR strategy can be used to:

  • Top up your income if you want to reduce your working hours in your current job (semi-retire)
  • “Boost your super and save on tax while you keep working full time”.

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 easy yourself into a non-working lifestyle.

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.

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 Australian Tax Office recommends that anyone considering a TTR income stream could benefit from seeking professional advice when it comes to the taxation implications.

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, but have the finances to maintain their lifestyle.

What are the possible cons of a TTR pension?

There could be a range of potential disadvantages to consider, such as:

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.

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 Aged Pension or Carer Payment. Services Australia, which manages government pensions, states that anyone applying for assistance must pass an income test. The department states that:

  • They “assess your and your partner’s income from all sources”, including “financial assets such as superannuation”
  • Pensions have income and asset limits, and “if you’re over these limits, you get a lower pension”

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.

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. As super fund MLC warns: “Your TTR pension is not guaranteed and may not last the rest of your life, pension payments can only be made while there are funds in your account. There is a risk that your pension income may cease (or reduce) if you draw your income too fast or if investment returns are poor.”

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).

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

What should I consider before transitioning to retirement?

Before you decide to cut back on your work hours, here’s some of the things you should consider:

  • Whether or not your super fund accommodates a TTR pension (some don’t)
  • How much income you would ideally need in this phase of your life, as well as in the future
  • The impact on any government entitlements
  • Whether life insurance 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
  • 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
  • How long your current super balance will last once you retire
  • If you’ve hit retirement age, you can already access your super, so you may not need 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.