If you’re in your late 50s or early 60s, understanding how a Transition to Retirement Pension (TTR) can help you prepare for retirement is essential. In this article, we’ll discuss what TTR pensions are, how they work, and their benefits.
What is a TTR Pension?
A TTR pension allows you to access your super while you’re still working, giving you more options in relation to your work and optimizing your tax position. A TTR pension was born out of the 2007 simple super reforms. It is the perfect tool for people planning for retirement.
A TTR pension goes by a few aliases that you may have heard of such as a transition to a retirement income stream, a Tris, a trip, a TTR pension, a non-commutable account-based pension, and an end-cap. However, all these terms refer to the same thing – a transition to a retirement pension.
How Does a TTR Pension Work?
You can start a TTR pension with all or some of your superannuation account balance. However, to be eligible to start a TTR pension, you need to have reached your superannuation preservation age, which is shown in a table. If you haven’t met your superannuation preservation age, you cannot start a TTR pension.
The rules of the TTR pension are simple. You must draw an income equal to between four per cent and ten per cent of your TTR pension balance each year. You cannot draw more, and you cannot draw less. If you start the pension part-way through a financial year, the minimum pension amount is proportionate, but the maximum remains at 10 per cent.
For example, let’s say you start a TTR pension with $300,000 on the 1st of July. In this case, the minimum pension income amount would be four per cent, which is $12,000. So, you would need to receive at least $12,000 in TTR pension payments throughout that financial year.
The maximum threshold would be ten per cent, which is $30,000. Therefore, you cannot draw an income in excess of $30,000 for the financial year.
The minimum and maximum pension amount is then recalculated on the 1st of July of each year based on your 1st of July balance. So, the 4 per cent and the 10 per cent will remain as percentage factors, but if your balance has dropped, your minimum and maximum pension amounts will also change.
Benefits of a TTR Pension
The beauty of a TTR pension income is that your pension payments can be used to supplement your work-related income if you’ve reduced to part-time work. Once you retire or reach age 65, whichever comes first, you would convert your TTR pension into an ordinary account-based pension.
An ordinary account-based pension has no maximum income threshold and a zero per cent tax on investment earnings.
Taxes on TTR Pensions
There are two types of taxes to consider with a TTR pension. The first tax is on investment earnings within the TTR pension account because your TTR pension balance remains invested, just like an accumulation account or an ordinary account-based pension.
The second tax is on the income that you receive from your TTR pension payments, which is taxed at your marginal tax rate, less a 15 per cent offset.