A Transition to Retirement (TTR) strategy involves balancing work and lifestyle while preparing for the future, offering Australians flexibility by supplementing income or increasing super savings. Tailored for those nearing retirement, it allows gradual adjustments, helping individuals ease into this significant life phase with confidence and security.
Retirement isn’t just a date on a calendar; it’s a significant transition that requires careful planning. With Australia’s 4.2 million retirees averaging a retirement age of 56.9 years, many Australians still aim to retire closer to 65[i]. If you’re approaching this milestone and not ready to stop working entirely, a Transition to Retirement (TTR) strategy could help bridge the gap between your career and full retirement.
Here, we unpack the TTR strategy, exploring its potential benefits, limitations, and how it can ease you into this exciting new phase of life:
What is a Transition to Retirement (TTR) Strategy?
A Transition to Retirement strategy allows Australians aged 60 or older to access their superannuation without fully retiring. By moving part of your super into a TTR account, you can draw a pension income of up to 10% of your super balance each year[ii].
This flexible approach serves two main purposes:
- Supplementing income if you’re reducing your work hours.
- Boosting your superannuation balance while saving on tax if you’re continuing to work full-time.
A TTR strategy is particularly useful for those looking to ease into retirement by trialling reduced work hours or for individuals aiming to maximise their retirement savings in their final working years.
Reduce work hours without losing income
For many, stepping back from full-time work during the lead-up to retirement is a dream. However, the fear of losing income often holds people back. With a TTR strategy, you can reduce your work hours while maintaining a steady income.
Example:
Alisha, 60 years old, is earning $50,000 a year[iii]. She decides to ease into retirement by cutting back her work hours to three days per week, reducing her income to $30,000. To offset this shortfall, Alisha transfers $155,000 of her super into a TTR pension and withdraws $9,000 annually, entirely tax-free. This allows her to replace some of her lost pay while enjoying shorter workweeks.
Not only does this approach provide financial security, but it also gives you the opportunity to test life in semi-retirement.
Boost your super and save on taxes
If you’re planning to continue working full-time, a TTR strategy can help you grow your superannuation efficiently while reducing your tax liability. This works by combining salary sacrifice contributions with income drawn from your TTR pension.
Example:
Kyle, a 60-year-old earning $100,000, wants to build additional retirement savings[iv]. He transfers $200,000 from his superannuation into a TTR account and begins salary sacrificing $20,000 of his income into his super.
- The salary sacrifice contributions are taxed at just 15%, compared to Kyle’s marginal tax rate of 30%, resulting in a significant tax saving of $6,000.
- To balance his cash flow, Kyle withdraws $10,000 annually from his TTR pension tax-free.
This strategy is particularly effective for higher-income earners and those with substantial super balances, though benefits can still be realised by individuals in lower tax brackets.
Considerations and limitations of a TTR strategy
While a TTR strategy offers flexibility and tax advantages, it’s not suitable for everyone. Here are essential points to bear in mind before deciding if it’s the right move for you.
Withdrawal limits
You can withdraw between 4% and 10% of your TTR balance annually[v]. Additionally, super benefits must generally be taken as regular income payments, not lump sums, unless under special exemptions[vi].
Impact on retirement savings
Accessing your super early means less money for retirement later. Adjusting your withdrawal rate and contributions is crucial to ensure long-term financial stability.
Effect on insurance
If you maintain insurance through your super fund, starting a TTR strategy may reduce or cease your coverage. Check with your super provider to understand the implications.
Tax and government benefits
For those under 60, pension payments are taxed at your marginal rate but attract a 15% offset, making them more tax-efficient than standard income[vii]. At age 60 and above, payments are entirely tax-free. However, any additional income may impact your or your partner’s eligibility for government benefits.
Complexity
The rules around TTR pensions, concessional contribution caps, and income tax can be intricate. A professional financial adviser can provide tailored advice to help you make an informed decision.
Is a TTR strategy right for you?
A TTR strategy works best for individuals who:
- Plan to gradually reduce their workload.
- Want to increase their super contributions while lowering their taxable income.
- Are seeking a way to balance personal and financial priorities in the years leading up to retirement.
It’s less effective for those with small super balances, as the tax and financial benefits may not outweigh the costs or setup complexities.
Retirement is a milestone worth celebrating, but it also demands careful preparation. Whether you’re aiming to work less, boost your financial nest egg, or simply test the waters of semi-retirement, a Transition to Retirement strategy offers a flexible way to meet your goals.
By understanding your personal circumstances and the nuances of the Australian retirement system, you can ensure a smooth transition, both financially and emotionally, into this rewarding phase of life.
If you would like more information on a Transition to Retirement strategy, or if you would like to discuss your superannuation and retirement planning, contact our office today.
DISCLAIMER: All information on Focus Wealth Advisers is general in nature and does not take into account your personal objectives, financial situation, or needs. You should consider your personal circumstances and seek professional advice before making any decisions based on this information.
[i] ABS (2024) Retirement and Retirement Intentions, Australia
[ii] ATO (2019) Changes to transition-to-retirement income streams.
[iii] Moneysmart (n.d.) Transition to retirement
[iv] Moneysmart (n.d.) Transition to retirement
[v] SuperGuide (2024) How a transition-to-retirement (TTR) pension works
