Is using a TTR the best of both worlds?
The days of an abrupt end to full time work, suddenly facing seven days a week of leisure are becoming a thing of the past for many older Australians. Yes, there are unforeseen life events like sickness or retrenchment which can end your working life without warning. But the overall trend is for 60+ year olds to cut back on full-time work, rather than retiring.
This transition towards retirement is an emotional, practical and financial journey.
So it’s useful that the Government has recognised this by creating a Transition to Retirement (TTR) strategy to assist older workers to manage the financial aspect of this change.
As with all good schemes, there is, of course a caveat when considering a TTR. And that is that you will most likely need input from an experienced adviser. There are many aspects to judging how effective this strategy might be in your own particular situation. The Government’s MoneySmart website states up front that TTRs are complicated to set up and so you are best to speak with either your super fund or a financial adviser before jumping in.
Centrelink of course has rules regarding TTRs and this is another important aspect of your planning that may need addressing. You can book an appointment with one of our Advisers if you need to discuss this.
Now let’s look at how they work.
What is a TTR?
A Transition to Retirement strategy, as its name suggests, allows workers who are above preservation age (55+, depending upon your year of birth) to transition from full-time work to part-time to no work, using super savings to top up your salary as your working hours diminish.
As well as allowing access to superannuation, TTRs allow you to continue to contribute to super, both through the mandatory Super Guarantee Contribution (SGC), plus discretionary salary sacrifice, so that you are replenishing your savings at the same time as drawing them down.
Sounds confusing? Here’s an example of how this works.
Maria wants more ‘me’ time
Maria earns $55,000 in her full-time role as an administration assistant in a pharmaceutical company.
She is 63 and wants to work three days per week (and will earn about $35,000 when this happens) but is prepared to transition first up by cutting back to a four day week to give her company time to replace her skills.
Maria has reached preservation age, had a chat with an adviser at her super fund and can see the benefits of using this strategy.
She renegotiates her role to four days (at an annual salary of $45,000) and as well as the 10% SGC contributions made by her employer, she decides to salary sacrifice another 10% of her earnings. The money Maria salary sacrifices is taxed at 15% which is lower than her marginal rate.
Using the TTR strategy, she sets up a TTR pension to pay herself for her ‘missing’ fifth day of work. This income is not taxed. She is also still increasing her super savings – now at a faster rate.
Of course there are rules attached.
The limit of withdrawals from a TTR account is any amount between 4 and 10% of your super savings used to commence the TTR account pension, as of 1 July of the current tax year. This percentage was halved as a response to the Covid pandemic in March 2020 and extended to June 30 2023.
Your activation of a TTR may also have an effect on your partner’s government benefits, so it is imperative that you research this strategy from a household viewpoint, not just for your own situation. Speaking to an adviser will help you fully understand all consequences of this strategy.
Terms and conditions attached to your superannuation (e.g. life insurance) may also be affected by starting a TTR strategy, so again seeking qualified advice to understand all ramifications is really important.
Pros and cons
The first really important benefit of a TTR is not financial at all – it is the very important upside of not changing abruptly from full time work to a life of Saturdays with all the emotional upheaval that this can bring. Stepping back gradually from the workplace means you can learn to create more life balance and test new activities in a more measured way. Research tells us that those who transition into retirement are more likely to keep social connection and sense of purpose in place.
There can also be clear tax benefits associated with TTRs, but these can only be measured and evaluated within the entirety of your personal situation and retirement income options.
Activating super drawdowns while still working may also give you a false sense of optimism about your income. The last thing you want is to burn through it. Again, doing the sums to see how your super drawdowns will work over a 30+ year life post-work is a really important plank in retirement income management. Booking a Retirement Essentials advice appointment allows you to see these sums in action, moving the dial up and down to see how your drawdown rate can be modified to ensure your nest egg is securely in place for the foreseeable future.
Max wonders if he can use a TTR when he goes back to work
Q. If I go back to work after retiring, can I use a TTR strategy to continue to contribute to my (rather depleted) super savings?
A. The answer to Max’s question is yes. Depending on Max’s personal circumstances and age this may be a great strategy for him. Booking a Retirement Essentials advice appointment will allow him to understand the rules and whether it could be worth considering.
This article is provided by Retirement Essentials Representative Number: 001260855. We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859. This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.