Transition to retirement Q&As: Part 1

You can commence a TTR with as little or as much as you wish, just check with your super fund or review your SMSF trust deed for any rules that may be applied by the fund.

TTRs are not considered to be “retirement phase income streams,” therefore the transfer balance cap that limits the amount that can be used to start a pension, does NOT apply to TTRs.

Q: Do I still need to be working to commence a TTR pension?

The TTR rules allow restricted access to superannuation balances once you have reached your preservation age, regardless of your work status. However, if you are not working and are retired, then you may be able to access your super by using another condition of release, without the need to use a TTR pension.

For instance, if you have reached your preservation age and are fully retired, you can access all your super by way of a retirement phase pension or even as a lump sum; you would not need to use a TTR. The same would apply where you have turned 65, regardless of your work status.

Your preservation age is determined by your date of birth and from 1 July 2024 the preservation age increased to age 60. Therefore, if you are looking to start a TTR pension at any time in the future, you will need to be at least 60 years old.

Q: Are transition to retirement pension payments tax free?

Pension payments that you receive before age 60 may be subject to tax, depending on the tax components that make up each pension payment. Keep in mind that pension payments are paid proportionately from the relevant tax components that make up the pension balance.

These tax components include:

• Tax-free component: These amounts come from your after tax (non-concessional) contributions into your super account. Pension payments made from your tax-free component are received tax free, there is no tax payable on these amounts.
• Taxable component: These amounts come from your concessional (before-tax) contributions, including employer contributions, salary-sacrifice contributions, and any personal super contributions for which you claimed a tax deduction. This component also includes all investment earnings related to your accumulation account.

If you are under age 60, the taxable component of your pension payments is included in your assessable income and taxed at your marginal tax rate, but you receive a 15% tax offset.

If you are 60 or older, the taxable component of your pension payments is received tax free.

Q: Are the fund earnings on my transition to retirement pension payments tax free?

No. Super fund earnings on assets that support TTR pensions are NOT tax free. The super fund will need to include any relevant fund earnings on these assets in their assessable income and pay the appropriate levels of tax.

This is because TTRs are not considered to be retirement phase income streams.

When the recipient of a TTR meets a further condition of release such as retirement or age 65, their TTR will become a retirement phase TTR and at that time, the relevant fund earnings will become tax free.

Q: How do I commence a TTR pension?

If you are a member of a retail or industry super fund, you should contact your fund and follow their pension commencement process. This would usually involve completing a pension application and nominating how much of your super balance you will be using to start your TTR pension.

For SMSF members, you will need to review your fund’s trust deed and follow all requirements set out for the establishment of a pension. Again, this would usually involve completing a pension application form and trustee minutes or resolutions. There would also be other administrative requirements that need to be addressed, for instance valuing the fund’s assets and bringing the fund’s financial accounts up to date so as to determine the member balance in the fund.

Q: Why have a transition to retirement strategy if you have enough income now for your means?

TTR pensions are completely optional. You are not forced to start one when you reach your preservation age, and those who already have sufficient income from other sources may not need to supplement their income with a TTR pension.

However, there may be other benefits in using one of the various TTR strategies, including:

• A tax strategy by making salary sacrificed contributions to super which are usually taxed at 15% rather than marginal tax rates and supplementing this income with tax-free pension payments from a TTR pension, where you are over age 60.
• Using a recontribution strategy to reduce or eliminate debt sooner.
• Estate planning strategies around the members tax components within the fund.
• Using TTR payments to equalise spouse super balances.

Q: I am turning 65 in a few weeks time, and I am still working. Can I commence a transition to retirement pension when I turn 65?

Turning 65 is a condition of release that allows full access to super benefits, so there would be no need for a 65-year-old to commence a TTR pension.

Instead, a 65-year-old would be eligible to start a retirement phase income stream.

Q: What restrictions apply to a transition to retirement pension?

There are annual limits imposed on the amounts that can be paid from a TTR pension:

• A minimum pension payment of 4% must be paid each year; and
• A maximum pension payment of 10% applies each year.

These minimum and maximum pension percentages are applied to the pension value at the start of the pension in the year that the pension is established and then applied to the 1 July pension balance for each year after.

Where a TTR pension begins on a day other than 1 July, the minimum pension amount is pro-rated based on the number of days remaining in the financial year.

Lump sum payments, often referred to as lump sum commutations, cannot be paid from a TTR pension.

Q: How is the transition to retirement pension amount determined? By the individual or is it a percentage of the amount in the TTR?

As mentioned above, a TTR recipient can withdraw any pension amount that is greater than the minimum 4% and no more than the maximum 10% of their TTR pension balance each year.

Q: Are there any disadvantages of commencing a TTR pension?

There are a few outcomes that need to be considered before setting up a TTR pension:

• Your end retirement savings balance will be reduced if you commence a TTR
• Your super fund may require you to maintain a minimum account balance in your accumulation account for any relevant insurance cover to be maintained
• A TTR pension may adversely impact any Government income support that you or your spouse or partner may otherwise be entitled to
• TTRs can create a cash flow issue for SMSFs and will often require a change to the fund’s investment strategy and asset allocation, such as an increase in the level of cash holdings.

Q: If I retire from my work, what happens to my transition to retirement pension? Does it need to stop?

A TTR pension does not automatically cease when the recipient meets a further condition of release such as retiring or turning 65. The TTR pension continues to be paid to the recipient.

It will however mean that the TTR pension is now considered to be a retirement phase pension, resulting in:

• The TTR pension balance will be assessed against the member’s transfer balance cap
• The removal of the 10% maximum pension limit
• The removal of any lump sum payment restrictions.

It is important to check the balance of your TTR pension before you meet a further condition of release to avoid creating a transfer balance cap issue.

For SMSF members, you will also need to check your trust deed for any fund specific rule that may apply. Some SMSF trust deeds may require an existing pension to be stopped before any existing restriction around payment levels can be changed.

SMSF trustees will also need to consider any transfer balance account reporting requirements that need to be seen to when a TTR pension enters retirement phase.

Q: Are there any tax outcomes when a TTR pension commences?

Starting a TTR pension should not automatically result in a tax outcome for your super fund or for you personally as there is no tax applied to the amounts transferred from the accumulation phase to the TTR pension.

However, you should seek tax advice if you are required to sell assets in your super fund for a transfer to be made into a separate pension account or product.