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What is a Transition to Retirement Pension?
You may have heard of the term Transition to Retirement and may have found yourself asking what is a Transition to Retirement Pension? Simply put, a Transition to Retirement (TTR) pension allows you to access your super without having retired, granted once you meet preservation age. A TTR will allow you to maintain your lifestyle while reducing your working hours or even your salary sacrifice arrangement, saving you tax.
To commence a Transition to Retirement Pension you will need to transfer a portion of your super from your accumulation account to a super account-based pension. You will need to leave a small amount of money in the accumulation account so that it can continue to receive ongoing employer contributions as well as any personal contributions you may make. This is also important because you may be funding your Personal Insurance arrangements through Superannuation and need to ensure your premiums continue to be funded.
As mentioned, to commence a TTR pension you must have met preservation, which is between the ages of 55 and 60; your preservation age is based off the year that you were born. If you meet preservation age and are under 65 years of age you will be able to draw down an income pension between 4% and 10% of the pension account balance each financial year. This income stream will act as a ‘supplement’ to your employment income, once you’ve reduced your working hours. It important to note that you cannot withdraw a lump sum amount.
Another benefit of the TTR pension, is that it can be rolled back into your super accumulation account at any time. Many super funds offer account-based pensions, making the transition a breeze. However, if you find that your super fund doesn’t have the option, it may be wise to discuss potential alternatives with your financial adviser. Please be aware you may trigger repeated internal Buy/Sell costs each time you transition between accumulation phase and pension phase.
Some of the benefits of starting a TTR pension is that it allows you to ease yourself into retirement, giving you the opportunity to get used to working less and to start investing that extra time in yourself and your hobbies. The income stream is also a great way for you to retain your current lifestyle while earning a lower income. You will also continue to receive employer contributions which will help balance out the amount you take out in pension payments. Lastly if you are over the age of 60, in most cases your pension payments will be tax free. If you are aged 55-59 then the taxable portion of your pension payments will be taxed at your marginal tax rate, however you will receive a 15% tax offset.
While the benefits are large at most, it’s important to note that one of the setback of starting a TTR pension is that it will leave you with less money in retirement.
If starting a Transition to Retirement pension is something you have given thought to and think you could benefit from it would be wise to sit down with a financial planner to discuss the best options for you and the potential impacts it may have. Please click here for more information on Transition to Retirement
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Written by Adam Watts of LifeTime Financial Group. A leading privately owned Melbourne Financial Planning practice.