Many people approaching retirement begin to picture shorter work weeks, more time along the coast or with family, and less time tied to the office or job site.
A Transition To Retirement Income Stream (TTRIS) can help turn that into reality by letting you draw an income from your super while you are still working, so you can cut back hours without cutting back your lifestyle. It can also help higher income earners use tax concessions to grow super in the final years before full retirement.
The following 10 step guide outlines how a transition to retirement income stream works, the rules that apply, and the key decisions to think through before you apply.
1. Check if you are eligible
To start a transition to retirement income stream, you must have reached your superannuation preservation age. For anyone born after 30 June 1964 this is age 60. For people born before then, preservation age ranges from 55 to 59 depending on date of birth. Your super fund or the ATO website can confirm your preservation age.
You also need to have enough in super to make an income stream worthwhile, while leaving a suitable balance in your existing accumulation account.
2. Decide what you want the strategy to achieve
There are two main ways Australians use transition to retirement income streams.
The first is to cut back working hours, for example moving from full time to three or four days a week, while topping up income with regular payments from super. This can suit people who want to spend more time travelling, at the beach or with grandchildren, without feeling like they are financially going backwards.
The second approach focuses on tax and super growth. If your taxable income is roughly between $45,000 and $250,000 a year, you may be able to salary sacrifice more of your pay into super, where it is generally taxed at 15%, and use your transition to retirement income stream payments to replace the cash you have sacrificed. This is sometimes called a “recontribution” or “tax efficiency” strategy.
Each of these strategies can be valuable, but they can also be complex to implement. Seek personal financial advice if you think they may suit your situation.
3. Understand how payments work
When you start a transition to retirement income stream, some of your super moves from the accumulation account into a pension account. You then receive regular payments from this pension account.
The rules set a minimum and a maximum you can take out each financial year. The minimum is a percentage of your pension account balance that depends on your age. For people under 65, the minimum is currently 4% of the 1 July balance. The maximum for a transition to retirement income stream is 10% of the pension account balance each year.
Within those limits, you can usually choose how often you are paid, such as monthly, quarterly or annually, and you can adjust your payment amount over time.
4. Know the tax treatment
Tax is a key reason many people consider a transition to retirement income stream.
Once you turn 60, payments from most taxed super funds are usually tax free in your hands. This can make it attractive to salary sacrifice more of your before tax salary into super, pay 15% contributions tax on that amount, and then draw tax free income back out through your pension to maintain your cash flow.
The earnings within your transition to retirement pension account, such as investment income and capital gains, are generally taxed at 15% rather than being fully tax free. When you fully retire or reach an age where you satisfy a full condition of release, your pension can convert to a standard account based pension, and the earnings on that account may then move into a tax free environment, subject to transfer balance cap limits.
Because the rules are detailed and may change over time, it is important to confirm tax settings for your situation before starting.
5. Think through other consequences
Shifting part of your super into a pension account affects the way your broader retirement picture fits together.
Employer super contributions
You cannot receive employer super guarantee contributions into a pension account. You will usually need to keep your accumulation account open with a sufficient balance so that your employer can continue paying contributions while you work.
Insurance inside super
If you have life insurance or total and permanent disability cover through your super, premiums are usually deducted from the accumulation account. If you move most of your balance into a pension account and leave too little in accumulation, you may unintentionally lose your insurance cover because premiums cannot be paid. It is important to check your insurance and work out how you will keep cover in place if you still need it.
Government benefits
If you or your partner receive the Age Pension or other government income support, a transition to retirement income stream may change your entitlements. Both the balance in your pension account and the income you draw from it can affect income and assets tests. Some people find that while they benefit from flexibility and lifestyle, their government benefits reduce.
6. Confirm your fund’s specific rules
Different super funds apply their own processes and sometimes their own additional conditions to transition to retirement income streams.
Before you decide, ask your fund about:
- Minimum balance requirements to start a pension
- Fees that will apply to the pension account and to the remaining accumulation account
- Investment options available for the pension account and whether they differ from your existing options
- Any restrictions on changing payment amounts or frequency
If you are using a self managed super fund, you will also need to make sure your trust deed allows a transition to retirement pension, and that trustee minutes and records properly document the decision and payments.
7. Choose your payment amount and frequency
Once you are confident the strategy is right for you, the next step is to decide how much you would like to receive and how often.
You will need to pick an annual amount that sits between the minimum and maximum that apply to you, then choose the payment frequency that suits your cash flow and budgeting. Many people prefer monthly payments so that their pension income feels like a regular pay cheque. Others choose quarterly or half yearly payments to line up with larger bills or planned travel.
It can be helpful to line up your pension payments with any planned salary sacrifice so that your take home income stays at a level you are comfortable with.
8. Complete the application
Your super fund will have its own application form for a transition to retirement income stream. This usually includes:
- Your personal details
- Your chosen pension start date
- How much of your super balance you want transferred from accumulation to pension phase
- Your nominated payment amount and frequency
- Details for where payments will be made, such as your bank account
You will generally need to provide proof of identity and confirm that you have reached preservation age. Some funds allow online applications, while others still use paper forms.
Once the fund processes your application, your money is moved into the pension account and your regular payments begin.
9. Keep thorough records
After your transition to retirement income stream is up and running, good record keeping makes life easier at tax time and when reviewing your plan.
It is sensible to keep:
- Copies of your original application and any subsequent change requests
- Annual pension statements showing your opening balance, payments, investment returns and closing balance
- Annual tax statements from your fund
If you have a self managed super fund, there are additional reporting and documentation requirements. These include preparing annual financial statements, lodging the fund’s tax return and ensuring pension payments and minimum drawdowns are correctly recorded.
10. Review your plan regularly
A transition to retirement income stream is not designed to be a set and forget strategy. The closer you get to full retirement, the more important it becomes to check that your pension settings still suit your needs.
Key times to review include:
- When your work hours or income change
- When your personal or family circumstances change
- When you become eligible for the Age Pension or other government benefits
- When you fully retire and need to convert your transition to retirement pension to a standard account based pension
Regular reviews help you keep your income, investment mix and tax position aligned with the lifestyle you want in retirement, whether that involves more time at the coast, travelling within Australia or simply enjoying a slower pace close to home.
If you would like to discuss how this applies to you, please reach out to our friendly team at Stream Financial.
The information contained on this website has been provided as general advice only. The contents have been prepared without taking account of your personal objectives, financial situation or needs. You should, before you make any decision regarding any information, strategies or products mentioned on this website, consult your own financial adviser to consider whether that is appropriate having regard to your own objectives, financial situation and needs.