Transition to Retirement: TTR and how it can work for you.
Recently, clients engaged us at Mulcahy & Co because they are in their mid-late 50’s, with a mortgage, and want to retire without one.
Having worked hard their entire lives, their plan is to reduce their work hours at age 60, and permanently retire with an eye to a life on the caravanning circuit at 65. Based on their calculations, they couldn’t see how this could be achieved with the pesky mortgage in the background. Enter: TTR
A ‘transition to retirement’ income stream allows a person who has reached their preservation age limited access to their superannuation, while they are still working. You start a TTR income stream by transferring some (most of the time, the majority) of your superannuation balance to an account-based pension, and retain a balance in your accumulation account to continue receiving your employer’s compulsory contributions, plus any voluntary contributions you make. As per legislation, you are required to draw between 4-10% of your account-based pension balance each year, and the same concessional and non-concessional contribution rules apply.
There are a few reasons why one would adopt a TTR strategy: to reduce work hours, to save on tax and to help pay lump sums.
Using a TTR to reduce work hours looks like the following: a person who has just turned 60 opts to reduce their output down to 3 days a week, but they still need the 5 day a week income equivalent. The TTR will give them access to a bulk of their superannuation funds, allowing them to draw a tax-free pension commensurate with the earned income they have lost.
You can use a TTR to save on tax by salary sacrificing into your accumulation account, say $15,000, and then drawing the same $15,000 from your account-based pension. The salary sacrificed amount receives a 15% tax-offset, and depending on your age, the amount you draw as a pension will also receive a 15% tax-offset. If you are over 60, you will pay no tax on this amount. Effectively, you are earning the $15,000 at a 15% or 0% tax rate and this is a great way to bolster your superannuation before retirement.
Finally, TTR strategies are a great way of accessing large amounts of funds to pay off debts. This brings me to our clients looking at retiring in a few years’ debt free. We helped them by suggesting a TTR plan where they transfer the bulk of their superannuation to an account-based pension and max out their annual concessional contribution cap of $25,000 each, resulting in the 15% tax-offset. As strong income earners, this was particularly appealing. We are then drawing the full 10% allowable from their respective pension accounts and directing this lump sum towards the mortgage.
As our clients are not yet 60, they will pay tax on the pension income, but will receive the 15% tax-offset here as well. Their cash flow is at a point where they can continue to make periodic loan repayments, which, coupled with the TTR lump sums, should see their mortgage repaid in 3 years instead of 7 or 8.
The downside to this is that they have drawn from their super, leaving less for retirement. Once the mortgage is gone however, we will continue to max out their concessional contribution limit each year until their total retirement at age 65, where the freedom of the caravan will be waiting.
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