Transition to Retirement Pensions:

What are they?

Transition to retirement refers to a strategy where those that have met their preservation age use their superannuation to draw an income (called a non-commutable pension), whilst at the same time boosting their superannuation through salary sacrifice. It was introduced by the Australian Government in July 2005 to encourage its workforce to remain working for longer.

The great thing about TTR is that it can be beneficial for those that are wanting to reduce their work hours as well as for those looking to increase their wealth by implementing while remaining in full time work.

How can it benefit you?

Benefits of transition to retirement can include:

  • Tax free income and earnings: Income drawn from, and earnings made within the non-commutable pension fund are tax free for those over the age of 60, whilst being concessionally taxed for those 55 and above
  • Increased superannuation savings: the tax savings you’ll receive can be diverted to your superannuation, resulting in an increased superannuation balance
  • Income boost: receive income from both your superannuation fund as well as your normal salary
  • Reduced work hours: TTR allows you to reduce the number of hours you work, while  maintaining the same level of income
  • Pay less tax: undertaking TTR means you can draw the same income but pay less tax!

Case Study:

It may be easiest to understand how a transition to retirement strategy works by using the following case study:

Consider Jasmine Albas, her date of birth is 01/01/1951, meaning  she is 60 years old. Her salary package is $109,000 (inclusive of the 9% SG Contributions). She would like to continue working full time and then retire at age 65. During this time she would like to boost her superannuation as much as possible, however she does not have a lot of surplus income to do so.

The below table shows the impact of a TTR strategy in relation to her situation:

Item Without TTR Strategy With TTR Strategy

Salary Income $100,000 $100,000
Salary Sacrifice $0 $31,176
Super Guarantee (9%) $9,000 $9,000
TTR Pension Income $0 $19,800
Total Income $100,000 $88,624
Taxable Income $100,000 $68,824
PAYG Tax $25,200 $14,291
Medicare Levy $1,500 $1,032
Total Tax Liability $26,700 $15,323
Net Income Received $73,300 $73,301

Under this plan, Jasmine salary sacrifices $31,176 to super and reduces her Salary to $68,824. To supplement her salary, Jasmine commences a transition to retirement pension with $198,000 of her super and takes $19,800 per annum as an income stream. Because Jasmine has reached her preservation age the super income will be tax free. Jasmine will be taxed at her marginal tax rate only on the $68,824. Under the TTR arrangement, Jasmine’s total tax liability is reduced by $11,377 to $15,323, while her net income (cash in hand) remains the same, at $73,301.

The second table shows how the above TTR strategy also boosts Jasmine superannuation savings:

Item Without TTR Strategy With TTR Strategy
Super – start of year balance $200,000 $2,000
Super Guarantee  $9,000 $9,000
Salary Sacrifice contributions $0 $31,176
Contributions tax  -$1,350 -$6,026
Earnings from super (net of fees) $13,551 $1,165
Earnings tax (15%) -$2033 -$174
Super – end of year balance $219,168 $37,140
TTR – start of year balance $0 $198,000
Income drawn from TTR $0 $19,800
Earnings from TTR (net of fees) $0 $12,645
TTR – end of year balance $0 $190,845
Super + TTR – end balance $219,168 $227,985

As you can see from the above, not only has Jasmine saved tax by undertaking TTR, she has also increased the value of her superannuation savings by $8,817 in year one while at the same time maintaining her take home income of $73,301.

Important Note:

There are some restrictions and eligibility criteria for TTR, so if you’d like to find out more about how they might relate to your personal circumstances, please call the office on (08) 9316 3050 to arrange a suitable time for an appointment or to discuss further. By doing so, we’ll assist in explaining TTR in detail and help you decide whether it is appropriate for you. 

This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, we recommend you consider, with or without the assistance of a financial adviser, whether the information is appropriate in light of your particular needs and circumstances.