Transition to Retirement

A transition to retirement (TTR) income stream is an account-based pension started before you retire. From preservation age - a flat 60 for anyone born after mid-1964 - you can move some super into a pension account and draw between 4 and 10 percent of the balance each financial year, while the employer's 12 percent guarantee keeps landing in your accumulation account. The payments are tax-free once you are 60. At 65 the TTR converts to a full retirement-phase pension, where earnings become tax-free too.

The catch sits in the earnings: a TTR pension is taxed up to 15 percent on investment earnings until 65, unlike a retirement-phase pension. That 15 percent is what removed the strategy's pre-2017 magic - before then, TTR earnings were tax-free and the recycling loop printed super. Today the strategy is a smaller, quieter tool: still useful, no longer a rort.

The structure is two accounts. You transfer part of your super into an account-based pension and keep the rest in accumulation, where the employer's 12 percent guarantee continues to land. The pension account must pay you a regular amount each year of at least 4 percent and at most 10 percent of its balance - on a $400,000 TTR, the band is $16,000 to $40,000. The minimum is recalculated on 1 July each year on the current balance.

The recycling loop is the classic use. A 62-year-old on $120,000 salary-sacrifices $20,000; taxable income drops to $100,000 and the take-home pay falls by $13,600 once the 32 percent tax saved is counted. The TTR pension then draws $13,600 - tax-free at 60 - and the take-home is whole again. Super has gained $20,000 less the 15 percent fund tax, roughly $17,000, while only $13,600 left the pension: a net super gain of roughly $3,400 a year with the same lifestyle. Modest is the honest post-2017 verdict.

The hours-reduction use is simpler. MoneySmart's case study has 60-year-old Alisha cut to three days a week on $30,000, transfer $155,000 to a TTR and draw $9,000 a year tax-free to replace the lost pay. The drawdown band still applies, the earnings tax still applies until 65, and the balance left in accumulation keeps collecting the guarantee. At 65 the whole structure converts to the retirement phase.

For an Australian reader, TTR is the bridge between a full salary and retirement. It covers the years past 60 where the super lock still holds and the marginal rate still bites. MoneySmart's transition-to-retirement pages are the authority, and the strategy has two shapes: cut the hours and top up the pay, or keep working and recycle the sacrifice. It also interacts with insurance: the premiums on cover inside super come out of the accumulation account, so the account needs enough left after the transfer. The salary sacrifice entry covers the pre-tax side of the loop.

A colleague named Brent (yes, that Brent) started a TTR at 60, drew the 10 percent maximum for five years and salary-sacrificed nothing. The drawdown-only version simply drains the pension. His $400,000 balance paid $40,000 a year out while earning 7 percent, and he arrived at 67 with less than if he had done nothing at all. The highest-leverage thing most Australians can do is pair the draw with a sacrifice. Check the arithmetic with the salary sacrifice calculator before the paperwork starts.