Understanding Transition to Retirement Pensions
As Australians move through their 50s and early 60s, many begin to think about reducing their work hours without dramatically cutting their income. A Transition to Retirement (TTR) pension, also known as a Transition to Retirement Income Stream (TRIS), is designed to help with exactly that.
Below, we outline how TTR pensions work, who can access them, and how they fit into modern retirement planning.
1. When You Can Start a TTR Pension
You can start a Transition to Retirement pension once you have reached your preservation age, which is 60 years of age.
You do not need to be retired to start a TTR pension. As long as you have reached your preservation age, you can begin drawing an income stream from your super while continuing to work full-time or part-time.
2. How It Works
When you start a TTR pension, you transfer part of your superannuation savings into a pension account. You will then receive payments from this account, subject to minimum and maximum limits set by the government.
While you can draw an income, the TTR pension is non-commutable, meaning you generally cannot take lump sums from it unless you meet a full condition of release, such as retiring permanently or turning 65.
The assets supporting your TTR pension continue to be taxed at up to 15% on investment earnings and realised capital gains. This is different from a retirement-phase pension, where investment earnings are tax-free. Once you retire or turn 65, your TTR pension can automatically convert into a retirement-phase pension, at which point earnings become tax exempt and your access to withdrawals may be unrestricted.
3. Why People Use a TTR Pension
A TTR pension can be used in several ways depending on your goals.
Reducing Work Hours
Many Australians use a TTR pension to top up their income as they move from full-time to part-time work. This allows for a gradual transition to retirement without a sudden drop in lifestyle.
Boosting Super Savings
Another common strategy combines a TTR pension with salary sacrifice. By sacrificing part of your pre-tax salary into super (which is taxed at 15%) and replacing that income with tax-free pension payments (if you are over 60), you can improve your tax efficiency and potentially boost your super balance.
Managing Cash Flow and Tax
If you are still working but want more flexibility with cash flow, for example to pay down debt or fund lifestyle expenses, a TTR pension can help. Pension payments received after age 60 are tax-free, and for those under 60, they may attract a tax offset.
4. Contribution and Drawdown Rules
Under current rules, the concessional contributions cap (covering employer and salary sacrifice contributions) is $30,000 per year. Those with a total super balance below $500,000 at the previous 30 June may be eligible to use unused concessional cap space from prior years, allowing for larger pre-tax contributions.
The Superannuation Guarantee (SG) rate is 12%. Employers continue making SG contributions while you are working, even if you have a TTR pension.
For pension payments, there are limits:
You must draw at least 4% of your pension balance each financial year (subject to government updates).
You cannot withdraw more than 10% of your balance per year while the pension remains in TTR phase.
5. Things to Watch
Impact on Super Growth
Withdrawals from your super reduce the amount that remains invested, which can affect your long-term balance and the sustainability of your retirement income. Even modest withdrawals, if taken too early or during periods of lower investment returns, can limit the compounding growth that super relies on.
This creates what is known as longevity risk - the risk of outliving your retirement savings. As people live longer and retirement periods extend well beyond 25 years for many Australians, drawing too much too soon can leave less capital to generate income later in life.
Insurance Held in Super
If your insurance premiums are paid from your accumulation account, moving too much into a TTR pension could affect your cover.
Administrative Complexity
Running both a TTR pension and an accumulation account adds a layer of complexity. You will need to monitor drawdowns, contributions, and compliance with limits.
Market Conditions
Because investment returns fluctuate, drawing income during volatile periods may lock in losses. Your investment mix should suit your stage of life and withdrawal needs.
6. Converting to a Retirement Pension
Once you permanently retire, reach age 65, or meet another full condition of release, your TTR pension can convert into a retirement-phase pension. This shift is significant because earnings on the assets supporting the pension become tax-free, and you can withdraw lump sums at any time.
From this point, your pension also counts towards your transfer balance cap, which limits how much can be held in the tax-free retirement phase. The general transfer balance cap is currently $2.0 million.
7. When a TTR Pension May Be Right for You
A TTR pension can make sense if you:
Have reached preservation age and want to reduce work hours without losing income.
Are aged 60 or over and can benefit from tax-free pension withdrawals.
Have room under your concessional contribution caps and want to boost super through salary sacrifice.
Want to manage tax in your final working years or smooth income leading up to full retirement.
It may be less suitable if your balance is small, if you are under 60, or if the administrative effort outweighs the benefit.
8. Key Legislative Settings (Current Overview)
Preservation age: 60 years of age
Concessional contributions cap: $30,000 per year
Non-concessional contributions cap: $120,000 per year (or $360,000 under bring-forward rules)
Carry-forward concessional contributions available if total balance is under $500,000
Superannuation Guarantee: 12%
Transfer balance cap: $2.0 million
Earnings tax rate in TTR phase: up to 15%
Earnings tax rate in retirement phase: 0%
The above applies to Australian tax residents.
9. Putting It All Together
A Transition to Retirement pension can be an effective way to ease into retirement while managing tax and maintaining lifestyle. It is not a one-size-fits-all solution, but when used strategically, particularly alongside salary sacrifice, it can deliver real value in the final years of work.
It is essential to seek personalised advice before implementing a TTR strategy. The optimal approach depends on income, tax position, super balance, investment mix, and personal goals.
General Advice Warning:
Any general advice on this page does not take account of your personal objectives, financial situation and needs, and because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. Information contained on this page was correct at the time of posting.