Transition To Retirement (TTR)


Can you remind me of the advantages of taking the pension payment? I know the pension payment to me is tax free once I’m 60. My understanding is that while I leave it in my Super the earnings get taxed – is this correct? What is the situation if I have the majority of funds as a Pension instead? Are any earning there taxed?

We need to break this down into the simple steps involved in the broader Transition To Retirement (TTR) strategy and its evolution.

The initial intent of TTR was to allow people the flexibility to reduce their working hours while maintaining their chosen level of net income through gradually drawing on their Super balance, by way of converting the majority of their funds from “accumulation phase” (Super as we know it) to “pension phase” (a form of Account Based Pension).

As is the case with many initiatives, the market then devises a variation on the standard process which helps to sweeten the deal through innovative use of tax/super legislation.

The primary eligibility criteria is age based, and for the moment this strategy can be considered from age 55, with potentially far greater benefits flowing from age 60 when the Pension received should be totally tax free. Prior to this there is effectively a credit of 15% calculated on the Pension received, which could be seen as being a little like Imputation Credits on Share Dividends where previous tax paid is recognised in the hands of the end beneficiary to help reduce the tax implications.

While TTR is often promoted as “robbing from Peter (your Pension) to pay Paul” (topping up your remaining Super through Salary Sacrifice), it is potentially Super’s normal 15% tax that is paid on net earnings which creates the greatest benefit of the whole TTR Strategy. When compared to the alternative 0% tax paid on the investment earnings (only if you have met a “condition of release”), it normally makes a lot of sense to move most of your capital into the Pension phase.

For the sake of example, let’s assume you have $500,000 in Super that earns a net 10% from its investments. At a tax rate of 15% this would mean your Super balance would have to pay $50,000 X 15% = $7,500 in Tax, whereas exactly the same capital having been transferred to Pension phase (after meeting a condition of release) should pay $0 Tax. It becomes a fairly easy argument to accept what in this case would amount to an extra 1.5% return on your Pension that would have been lost if it stayed as a Super Accumulation fund.

Of course that simplifies the issues, but in my mind, that extra amount in earnings should of itself, at least be grounds for seriously contemplating a TTR Strategy.

As a further benefit, if you chose to redirect the extra cash flow you receive through the Pension back into Super as a Salary Sacrificed Contribution, due to tax rate arbitrage, you will find that you need to draw far less from your Pension for the same net-in-your-pocket position compared to taking taxed Salary, but that is getting a little complex for our purposes here.

Cheers, and if you know of a family member or friend we can assist, please don’t hesitate to share with them.
Dave Dyson

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