A transition to retirement strategy is designed to help people move gradually from full-time work to retirement. Once individuals have reached their preservation age—which is age 60 from 1 July 2024—they can begin accessing some of their superannuation while still working. This approach offers significant flexibility for those contemplating how to transition into retirement without making an abrupt change.
While transitioning to retirement, people can draw a tax-free income of between 4% and 10% of their TTR account balance each financial year. Additionally, for those earning around or above £250,000 per year, this strategy may help save on tax, as some contributions might otherwise be taxed at 30% rather than 15%. Essentially, a well-planned transition to a retirement account can both provide income flexibility and potentially boost super balances through tax advantages.
In this article, readers will discover precisely how transition to retirement works, the specific rules they need to follow, and practical ways to set up and maximise their transition-to-retirement strategy for a smoother journey into their retirement years.
What is a Transition to Retirement Strategy?
A transition to retirement strategy offers a gradual pathway into retirement, avoiding an abrupt shift from full-time employment to complete retirement. This approach allows access to superannuation benefits while continuing to work, creating a bridge between working life and retirement.
How Does the Transition to Retirement Work?
The transition to retirement strategy allows individuals to access a portion of their superannuation once they’ve reached preservation age, which is age 60 from 1 July 2024. Under this arrangement, a person can open a transition to retirement income stream (TRIS) that permits regular withdrawals from their superannuation savings.
Under the transition to retirement rules, participants must withdraw between 4% and 10% of their superannuation balance each financial year. Furthermore, these withdrawals must be taken as regular payments rather than lump sums—the technical term being a “non-commutable” income stream.
The practical implementation typically involves two accounts:
- A transition to a retirement income account (from which regular payments are drawn)
- An active super account (which continues to receive employer and any personal contributions)
To establish a TTR income account, individuals need to transfer at least $15,289.90 from their super savings while leaving at least $9,173.94 in their original super account to keep it active. Notably, once the account is opened, additional money cannot be added to the TTR income account, although contributions can still be made to the regular super account.
60 and Over
The transition to retirement strategy offers particular advantages for those aged 60 and over, primarily through tax benefits and lifestyle flexibility.
Tax advantages:
- Income payments from a TTR income account are completely tax-free for individuals aged 60 or older
- Investment earnings are subject to a maximum tax rate of 15%, the same as super accumulation funds
Lifestyle benefits:
- Reduced working hours without reduced income—supplementing part-time pay with TTR payments
- Opportunity to “test drive” retirement by experiencing more leisure time while maintaining financial security
- Ability to boost super through salary sacrifice or personal contributions while drawing TTR income
- Continued employer super contributions, helping to replace some withdrawn funds
For those who find the thought of abruptly stopping work unsettling, a TTR strategy provides a gentler transition. It allows individuals to gradually adjust to retirement by reducing work hours while maintaining their income level, or to continue full-time work while potentially gaining tax advantages.
The strategy is particularly valuable for those wanting to:
- Wind down their career gradually
- Take up new hobbies or interests before fully retiring
- Address financial pressures during the transition period
- Boost super in the final working years
Nevertheless, this approach isn’t suitable for everyone. The complexity of the transition to retirement arrangements means financial advice is often recommended before implementation. Moreover, drawing down super early may reduce the total amount available in complete retirement, which should be carefully considered.
When a person fully retires, stops working for an employer, or turns 65, their TTR income account typically converts to a standard retirement income account with additional benefits, including tax-free investment returns and no maximum withdrawal limits.
Eligibility and Rules You Need to Know
The foundation of a successful transition to retirement strategy rests on understanding the precise eligibility criteria and operating rules. Specific conditions determine who can access these arrangements and how they function.
Preservation Age and Access Conditions
To commence a transition to retirement income stream (TRIS), individuals must first reach their preservation age, which is 60 years from 1 July 2024. This is the minimum age at which preserved superannuation benefits can be accessed without fully retiring or leaving employment.
Unlike traditional retirement arrangements, a TRIS allows access to superannuation benefits while continuing to work, either full-time or part-time. The key requirement is that benefits must be taken as a “non-commutable” income stream. This means the money cannot be converted into a lump-sum cash payment while still working—all withdrawals must be structured as regular payments.
To establish a transition to retirement account, individuals need to transfer a minimum amount (at least AUD 15,289.90, depending on the fund) from their superannuation savings. Importantly, a small balance must remain in the original super account to continue receiving employer contributions and any personal contributions.
Withdrawal Limits and Income Stream Rules
The transition to retirement rules establish specific annual withdrawal requirements:
- Minimum withdrawal: 4% of the account balance each financial year
- Maximum withdrawal: 10% of the account balance each financial year
These limits are calculated when the account is opened and then recalculated on 1 July each subsequent financial year. For partial years (starting mid-year), the minimum 4% amount is prorated based on the number of days remaining in the financial year, whereas the maximum 10% amount is not prorated.
For example, with a TTR pension balance of AUD 764,495.12, the annual withdrawal limits would be:
- Minimum: AUD 30,579.80 (4% of balance)
- Maximum: AUD 76,449.51 (10% of balance)
As individuals age, minimum withdrawal percentages typically increase. However, once a person reaches age 65, their transition to a retirement pension automatically converts to a standard account-based pension with no maximum withdrawal limit.
Transition to Retirement Rules for Tax
Tax considerations are a critical aspect of transition to retirement arrangements. For individuals aged 60 or older, pension payments from a TTR account are entirely tax-free. Conversely, those under 60 face different tax treatment—the taxable portion of pension payments is taxed at their marginal rate but with a 15% tax offset.
Regarding investment earnings, a TRIS is only treated as exempt current pension income when it enters the “retirement phase”. A TRIS moves into the retirement phase when the member:
- Reaches age 65
- Retires after reaching preservation age
- Becomes permanently incapacitated
- Has a terminal medical condition
Prior to entering the retirement phase, earnings from assets supporting a TRIS are taxed at 15%, similar to standard super accumulation accounts. Once in the retirement phase, these earnings become tax-exempt.
Finally, transition to retirement arrangements may impact Centrelink entitlements, as balances form part of the assets and income tests used to determine Age Pension eligibility.
How to Set Up a Transition to Retirement Account
Setting up a transition to retirement account involves several practical steps. Once you’ve determined that this strategy suits your needs, the actual implementation process is straightforward yet requires attention to specific details.
Opening a TTR Pension Account
To establish a transition to retirement income stream, you must first have an active superannuation account. Subsequently, you can open a TTR pension account through your super fund:
- Contact your superannuation provider about their transition to retirement options
- Complete the required application forms
- Provide identification documents as requested
- Specify the amount you wish to transfer from your super account
Many super funds automatically open an accumulation account for members, which serves as the foundation for establishing a TTR pension account. Once the TTR account is created, you’ll manage your payments—including both frequency and amount—subject to government regulations.
Keeping your Super Account Active
It’s crucial to maintain your original super account alongside your new TTR account for several reasons:
If you wish to continue receiving employer contributions or make additional personal contributions, your accumulation account must remain open. Likewise, if you have insurance coverage through your super that you want to maintain, keeping the accumulation account active is essential.
Most superannuation funds require a minimum balance in your accumulation account—typically around AUD 9,173.94. This ensures the account remains viable for ongoing contributions and management.
Choosing How Much to Transfer
When establishing a TTR account, you need to determine an appropriate amount to transfer from your super:
Firstly, most funds require a minimum transfer amount to open a TTR account—generally about AUD 15,289.90. The specific amount may vary between providers, hence check with your fund.
Indeed, once you transfer funds to your TTR account, you cannot add more money to it directly. Therefore, careful consideration of your income needs is essential before determining the initial transfer amount.
Setting your Payment Frequency
A key advantage of the TTR strategy is its payment flexibility:
You can customise how often you receive payments from your TTR account based on your financial needs. Options typically include fortnightly, monthly, quarterly, half-yearly or annual payments.
Throughout the financial year, you must withdraw between 4% (minimum) and 10% (maximum) of your TTR account balance. For instance, with a TTR account balance of AUD 451,052.12, your withdrawal limits would be between AUD 18,042.08 and AUD 45,105.21 for the year.
The flexibility extends to adjusting your payment settings. You can modify both amount and frequency at any time through your online account portal or by submitting the appropriate form to your super fund. This adaptability allows your TTR strategy to evolve as your financial circumstances change.
Ways to Use a TTR Strategy Effectively
Once your transition to a retirement account is established, there are four main ways to use this strategy to your advantage.
Reduce Work Hours Without Losing Income
The transition to retirement strategy enables individuals to ease into retirement by working fewer hours whilst maintaining their income. For those aged 60 or older, this approach allows them to supplement reduced employment income with tax-free withdrawals from their TTR account.
Boost Super Through Salary Sacrifice
Indeed, a TTR strategy can simultaneously grow retirement savings whilst providing tax advantages. By salary sacrificing into super (which is taxed at 15%) and replacing this income with TTR payments, individuals may significantly reduce their tax burden.
Access Funds for Significant Expenses
Specifically, a TTR strategy permits access to between 4% and 10% of super funds each financial year. This arrangement provides flexibility to address significant expenses without fully retiring or compromising long-term financial security.
Nonetheless, it’s worth noting that TTR pensions don’t allow lump-sum withdrawals – all funds must be taken as regular income stream payments. The income received is based on the amount in super, hence withdrawals should be planned carefully to avoid depleting retirement funds prematurely.
Maintain Insurance and Employer Contributions
Undoubtedly, one of the key benefits of a TTR strategy is the continuation of employer contributions. Super guarantee payments continue for as long as employment continues, even when working reduced hours.
Additionally, by keeping the superannuation account open, individuals retain any associated insurance coverage. This ensures vital protections remain in place during this transitional period.
In sum, a properly structured TTR arrangement bridges full employment and complete retirement, offering both financial flexibility and security during this significant life transition.
Tax Benefits and Financial Considerations
The tax advantages of a transition to retirement strategy often make it a compelling reason to adopt it. Understanding these benefits and related financial considerations helps individuals maximise the value of this approach.
Tax-Free Income after Age 60
For individuals aged 60 or older, all pension payments received from a transition to retirement income stream are entirely tax-free. This creates an immediate financial advantage over regular employment income, which remains subject to normal tax rates. Conversely, those aged 60 or older face different treatment—the taxable portion of their pension payments is taxed at their personal marginal rate, yet they receive a 15% tax offset. This offset effectively reduces the tax payable on these payments, offering a partial advantage even before reaching 60.
Tax on Investment Earnings
Investment earnings in a transition to retirement account are treated differently depending on whether the account has entered the “retirement phase.” Before this phase, earnings from assets supporting the TRIS are taxed at 15%. A TRIS enters the retirement phase when the member reaches age 65, retires after preservation age, becomes permanently incapacitated, or faces a terminal medical condition. Once in the retirement phase, investment earnings become tax-exempt. This transformation creates additional tax benefits beyond the pension payment advantages.
Impact on Social Security and Entitlements
Starting a transition to retirement pension may affect eligibility for government support payments. Both the individual’s and their partner’s entitlements could be affected, as the TTR pension is included in the assets and income tests used to determine Age Pension eligibility. Given these potential implications, consulting with a Services Australia Financial Information Service officer is advisable. Even though no income tax may be payable after implementing SAPTO (Seniors and Pensioners Tax Offset), the Medicare levy might still apply based on taxable income.
Conclusion – Transition to Retirement Strategy
Planning your transition from working life to retirement deserves careful consideration. Transition to retirement strategies offer a practical pathway for those approaching retirement, particularly individuals who have reached preservation age. Through this approach, accessing between 4% and 10% of superannuation annually becomes possible while maintaining employment.
The financial advantages certainly make this strategy worth exploring. For those aged 60 and above, tax-free income streams present significant benefits compared to fully taxable employment income. Additionally, maintaining both a TTR account and an active super account allows continued employer contributions, thereby sustaining growth in retirement savings even during the transition period.
This strategy provides remarkable flexibility. People can reduce working hours without reducing income, boost superannuation through salary sacrifice arrangements, access funds for substantial expenses, or simply maintain valuable insurance coverage. Each approach serves different needs depending on personal circumstances and financial goals.
Before implementing any transition to retirement strategy, consulting with a financial advisor is beneficial. The rules governing withdrawal limits, tax implications, and potential impacts on government entitlements require a thorough understanding. Though setting up a TTR account follows straightforward steps, the decision-making process demands careful consideration of long-term financial well-being.
The journey toward retirement need not happen overnight. Rather than an abrupt shift from full-time work to complete retirement, a well-planned transition creates a smoother path. This gradual approach allows individuals to adapt financially and psychologically to retirement, thereby creating a more sustainable and satisfying experience during this significant life change.
What is a Transition to Retirement (TTR) strategy?
A Transition to Retirement strategy allows individuals aged 60 and over to access up to 10% of their superannuation each financial year while continuing to work. It provides a gradual way into retirement, offering flexibility in managing income and work hours.
How can I effectively use a TTR strategy?
You can use a TTR strategy to reduce work hours without losing income, boost your super through salary sacrifice, access funds for large expenses, or maintain insurance and employer contributions. The approach you choose depends on your personal circumstances and financial goals.
What are the tax benefits of a TTR strategy?
For individuals aged 60 or older, income from a TTR account is completely tax-free. Additionally, investment earnings within the account are taxed at a maximum of 15% until the account enters the ‘retirement phase’, after which they become tax-exempt.
How do I set up a Transition to Retirement account?
To set up a TTR account, contact your superannuation provider, complete the required application forms, and specify the amount you wish to transfer from your existing super account. You’ll need to keep your original super account active with a minimum balance and set your preferred payment frequency for the TTR account.
Will a TTR strategy affect my government entitlements?
Yes, starting a TTR pension may impact your eligibility for government support payments. Both your and your partner’s entitlements could be affected as the TTR pension is considered in the assets and income tests for Age Pension eligibility. It’s advisable to consult with a financial advisor or Services Australia for personalised advice.