Transition To Retirement ("TTR")

What is ("TTR")

Previously you could only access your super once you had turned 65, however now you can commence a Transition to Retirement ("TTR") pension account when you reach your preservation age (for most people this is 55 years old). Clients often use a Transition to Retirement Strategy to reduce their tax, increase their current income or reduce their working hours while keeping their income the same.

A TTR Strategy

When a Transition to Retirement account is setup you effectively have two accounts:
1. A Super Account—to receive contributions from yourself or from your employer as super guarantee or salary sacrifice.This is the account you will have setup at the moment. 
2. A TTR Account— Money is then transferred from your Super Account into your TTR Account. You can then access up to 10% of the money in your TTR account. 
 
You can use this strategy to grow your super savings before you retire, by contributing more of your salary to super. It can also be used to reduce your working hours and maintain your income level.

Save Money on Tax

A TTR Strategy is excellent in helping you reduce your tax. In a nut shell you salary sacrifice (pay money) in your super and receive a tax deduction for it. This can be done as a lump sum or your employer can take it from your pay each week and pay it for you. You then withdraw from your TTR account at a reduced tax rate or tax free if you are over 60 years old. Your salary sacrifice contributions are taxed at 15% instead of your individual income tax rate which are often over 30% and can be as high as 47%. The average client using this strategy saves about $3,000 or $5,000 per year in tax. 

Reduce your working hours 

If you reduce you working hours, you will naturally be earning less money. This reduction or fall in pay can be offset by accessing part of your superannuation via your TTR account. This allows you to therefore work less hours without a loss in overall income. However it will reduce your superannuation savings.
 

How is the income from your TTR account taxed?

Income taken from a TTR account is taxed in the same way an account based pension is taxed. If you are within your preservation age and age 60, there is a 15% tax offset available to reduce the tax payable on the taxable component of your TTR account. Furthermore while the money is invested in the TTR account earnings made are tax free, compared a normal super fund accumulation account which is taxed at the normal 15% tax rate. After the age of 60 all pension accounts are ‘generally’ tax free.
 

TTR Case Study:

Case Scenario: James Smith

James Smith has just turned 60 and has decided he wants to start a transition to retirement account (TTR). He provides the following information to his financial adviser:
- Annual Salary $75,000.
- James’s current super balance $255,000.
 
James decides that he will transfer $250,000 to his new TTR account and leave $5,000 in his normal super-accumulation account. No tax will apply on the lump sum payment.
 
See the below case studies in which James can implement his new TTR account.

Scenario 1: Growing his super

- In this scenario James wants take advantage of the various tax benefits for increasing his superannuation.
- James elects to receive a TTR income payment of 6% ($15,000) of the balance of this superfund. James will be taking home a similar income amount and the income he will receive from his TTR will be tax free as he is aged 60.
- James salary sacrifices up to his concessional contributions cap of $35,000, which includes both salary sacrifice and super guarantee contributions (9.5%).
 
  Without TTR With TTR
Salary $75,000 $75,000
Salary Sacrifice $0 $27,875
TTR Income $0 $15,000*
Taxable Income $75,000 $47,125
Tax Payable $15,699 $7,512
Net Income $59,301 $54,613
 

Summary

- James has effectively increased his super account by $27,875(Excl. 15% tax payable), only drawn down $15,000 of his TTR account. 
- Also he has reduced his tax payable by $8,187 by only reducing his income by $4,688.

Scenario 2: Reducing his working hours

- In this scenario James wishes to scale back his time spent at the office, he therefore begins working part time.
- James elects to receive a TTR income payment of 10% of his superannuation balance being $25,000. James will be taking home a similar income amount and the income he will receive from his TTR will be tax free as he is aged 60.
 
  Without TTR Part Time With TTR
Salary $75,000 $37,500
Salary Sacrifice $0 $0
TTR Income $0 $25,000*
Taxable Income $75,000 $37,500
Tax Payable $15,699 $4,047
Net Income $59,301 $58,453

Summary

- James has effectively reduced his working hours by half and drawn down $25,000 from his TTR account. 
- Also he has been able to reduce his tax payable by $11,652, with only taking an income reduction of $848

As you can see from the 2 examples, the benefits of a Transition to Retirement Strategy can be dramatic. 

Important Considerations:

-Fees that are payable in commencing a TTR account.
-The tax treatment on your TTR account depends on your age.  If you are aged between 55 and 59, there is a taxable component. You will receive a 15% tax offset on your income against what your marginal tax rate is for receiving the TTR income.

The Next Step

Setting up a Transition To Retirment Account is very easy. Real Wealth will complete all the necessary paperwork for you and help you make any addition contributions and process withdrawals. From here, the next step is to contact Real Wealth and see if a Transition To Retirement account is right for you. Call us on 1300 725 889 or email support@realwealth.com.au

The information provided if general information only and should be considered as a guide only. This guide does not cover all aspects of a Transition to Retirement strategy including the current caps or limitations imposed by the Australian Government. It is therefore very important you contact Real Wealth to seek financial advice before setting up such a Transition To Retirement Strategy. 
 
--By James Ridley.