Transition to Retirement (TTR) Strategy: How to Work Less While Boosting Your Super Balance

For Australians approaching retirement age who want to ease into their next life chapter rather than stopping work abruptly, Transition to Retirement strategies offer a compelling option. A TTR arrangement allows you to access some of your superannuation while still working, enabling you to reduce your hours, supplement your income, or implement tax-effective strategies that actually boost your retirement savings. This comprehensive guide explains how TTR works and whether it might be right for your situation.

What is Transition to Retirement?

Transition to Retirement is an arrangement that allows you to access your superannuation as a pension income stream once you reach your preservation age, even if you are still working. Your preservation age depends on when you were born: it is 55 for those born before 1 July 1960, and gradually increases to 60 for those born after 30 June 1964. Once you reach this age, you can convert some or all of your super into a TTR pension and start receiving regular payments while continuing in employment.

The original purpose of TTR was to help older workers gradually reduce their working hours while maintaining their income by supplementing reduced wages with super pension payments. However, it has also become popular as a strategy for workers who continue full-time employment but use the arrangement to gain tax advantages. Under a TTR pension, you must withdraw between 4 per cent and 10 per cent of your pension balance each financial year. Unlike a full retirement pension, you cannot withdraw lump sums, and the balance cannot be accessed entirely until you meet a full condition of release such as retirement.

How the Two Main TTR Strategies Work

The first and most straightforward TTR strategy is using pension payments to supplement reduced work income. For example, if you reduce your working week from five days to three, your salary drops accordingly. By commencing a TTR pension, you can draw income from your super to make up some or all of the difference, maintaining your overall income while enjoying more leisure time. This approach gives you a taste of retirement lifestyle while still remaining connected to the workforce.

The second strategy involves maintaining full-time work while using TTR for tax benefits. In this approach, you salary sacrifice a portion of your income into super, reducing your taxable income, while simultaneously drawing TTR pension payments to replace the salary sacrificed. The net effect is broadly income-neutral, but you may pay less total tax because salary sacrifice contributions are taxed at 15 per cent in super rather than your marginal rate, while TTR pension payments receive a 15 per cent tax offset for those aged 60 and over. Use our superannuation calculator to model how different contribution and withdrawal scenarios might affect your overall position.

Tax Considerations for TTR Pensions

The tax treatment of TTR pensions has changed significantly over time, and understanding the current rules is essential for evaluating whether a TTR strategy makes sense. If you are aged 60 or over, TTR pension payments are completely tax-free in your hands. This makes the tax arbitrage strategy particularly effective for those over 60 who are in higher tax brackets, as they can salary sacrifice at 15 per cent and withdraw tax-free.

However, there is an important consideration within the super fund itself. Unlike account-based pensions commenced after full retirement, TTR pensions do not benefit from tax-free investment earnings within the fund. The assets supporting a TTR pension remain in the accumulation phase tax environment, meaning investment earnings are taxed at up to 15 per cent within the super fund. This changed in 2017, removing one of the previous advantages of TTR strategies. The calculation of whether TTR provides a net benefit now depends more heavily on your personal marginal tax rate and the amount you can salary sacrifice, making individual advice important before implementing this strategy.

Who Benefits Most from TTR Arrangements?

TTR strategies tend to provide the greatest benefits for certain groups of workers. Those who are over 60 and in higher tax brackets often benefit most from the tax arbitrage approach, as the gap between their marginal rate and the 15 per cent super contributions tax is largest. Someone earning $150,000 per year who salary sacrifices $25,000 into super saves significant tax compared to receiving that amount as salary, and can replace the cash flow by drawing from their TTR pension tax-free.

Workers who genuinely want to reduce their hours as they approach retirement also benefit from TTR, regardless of tax considerations. The ability to maintain income while working less can be valuable for health, wellbeing, and the psychological adjustment to eventually stopping work entirely. Additionally, TTR can be useful for those who need to access some super due to financial necessity before reaching full retirement. However, it is important to recognise that drawing on your super before full retirement means less money will be available later, so this should be balanced against long-term needs.

Risks and Limitations to Consider

While TTR strategies can be beneficial, they are not without risks and limitations. The most fundamental issue is that every dollar withdrawn as a TTR pension is a dollar that is no longer invested for your retirement. If you continue working full-time and implement a tax arbitrage strategy, the salary sacrifice contributions can offset the withdrawals, but for those genuinely reducing work hours, the super balance will decrease over time. Carefully consider whether you can afford to draw on your super before traditional retirement age.

Administrative complexity is another consideration. Running a TTR strategy effectively requires careful coordination of salary sacrifice amounts, pension payments, and tax obligations. Many people engage financial advisors to implement and monitor TTR arrangements. The costs of this advice need to be weighed against the potential benefits. Additionally, once you start a TTR pension, you are committed to taking minimum annual payments even if your circumstances change. If you return to full-time work or no longer need the income, you may not want to be drawing down super but will be required to take at least the minimum percentage.

Steps to Implement a TTR Strategy

If you decide that a TTR strategy is right for your situation, several steps are involved in implementation. First, confirm that you have reached your preservation age and are therefore eligible to commence a TTR pension. Next, decide how much of your super balance to allocate to the TTR pension; you do not need to convert your entire balance, and leaving some in accumulation phase may be appropriate depending on your strategy.

Contact your super fund to initiate the TTR pension. Many funds can establish a TTR pension alongside your existing accumulation account, though some may require you to move to a different product or platform. Determine how much income you want to receive, remembering the minimum 4 per cent and maximum 10 per cent rules. If implementing a salary sacrifice strategy alongside, arrange for salary sacrifice contributions with your employer's payroll department. Finally, ensure you understand the tax implications and reporting requirements, and consider engaging a financial advisor or accountant to review your overall position and help optimise the strategy.

Conclusion

Transition to Retirement arrangements offer valuable flexibility for Australians approaching retirement, whether you want to gradually reduce work hours while maintaining income, or you are seeking tax-effective strategies to boost your overall position. However, the benefits depend heavily on individual circumstances including your age, tax bracket, super balance, and retirement timeline. The 2017 changes to TTR tax treatment mean the strategy is less universally advantageous than it once was.

Before implementing any TTR strategy, carefully consider your overall financial position and long-term retirement goals. Drawing on super before full retirement has permanent implications for your retirement lifestyle. Seek professional advice to determine whether a TTR arrangement is right for you and to optimise the structure for your specific situation. When implemented appropriately, TTR can be a powerful tool for managing the transition from full-time work to retirement.