RSM Australia

Rethinking the value of Transition to Retirement (TTR) pensions

A Transition to Retirement (TTR) Pension still offers a number of benefits to you as an investor preparing for retirement.

Despite the changes to the tax free earning status of a TTR, you shouldn’t be too hasty in discounting this option as it can form a central part of a bigger retirement accumulation strategy.

Some of the key benefits that you can still take advantage of include:

1 - Provide Additional Income with Some Tax Benefits

If you're looking to reduce your work commitments to say part-time or maybe you want to top up your existing income to assist with debt reduction, then a TTR Pension will continue to deliver ongoing cash flow benefits to you.

Although you must draw a minimum of 4% per year, you can still draw up to 10% of the value of the fund each year. 

Furthermore, once you reach age 60, pension payments will become tax free (pension minimums).

This compares to regular super accounts where access is generally not available until you meet a condition of release, such as permanent retirement or a change in employment after age 60. By continuing with a TTR pension this provides at least partial access to your super should you require it.

2 - Rebooting a TTR to Grow Your Retirement Wealth

A key distinction between the TTR Pension and the Account Based Pension rules is that a TTR pension is currently not restricted by $1.6 million transfer limitTTR

Therefore although a TTR Pension's investment returns will be taxed like a standard super fund, you can draw a pension from it up to the 10% annual limit, plus you can also continue to reboot these annually. 

A pension reboot is where any additional contributions made to super are added to the remaining balance of your pension account to recommence a new pension. This can be a great way to increase your wealth in a TTR Pension or to simply replenish the balance of the TTR Pension, reduced by the drawn down pension payments.

A pension reboot can work well when combined with a super contribution strategy, however, it requires you to carefully monitor the drawings from your pension, tax and the contributions back to super, to ensure that the strategy will work in your favour. 

The greatest limitation is the super contribution caps which restrict the benefit obtained.

This is one of the more complicated uses of various retirement strategies which should always be undertaken with the assistance of a retirement specialist.

3 - TTR Pensions Freeze the Tax Free Component 

A significant additional benefit of TTR pensions is that the ratio of tax free and taxable components is fixed when the pension is created. 

This means that if during the year your pension increases in value, due to investment returns, then the tax free proportion of the pension will also increase.


Example

If a Transition to Retirement Pension started with a tax free portion equal to 15% of the pension value, and a starting value of $350,000 then it would have a tax free component value of $52,500.

i.e. $350,000 * 15% = $52,500

Then if the fund increased to say $400,000, the tax free value would increase to $60,000.

i.e 400,000 * 15% = $60,000


The significance of the tax free portion can really been seen in the following two key areas:

  • First when paying your pension under age 60, as you are only taxed on the taxable component of the pension; and
  • Second when distributing your pension benefits on your death. Tax to beneficiaries is only payable on the taxable component. So from an estate planning perspective, this can help to reduce the tax paid by non-financial dependent beneficiaries on their inheritance.

4 - TTR Pensions Segregate Assets for Estate Planning

Maintaining a TTR pension can be very useful for estate planning purposes where the pension account is held separately from your super accounts. In this case, your pension benefits can be directed to a particular dependant, by-passing your Will and potentially any challenges to your Estate.

With blended families and adult children from different marriages, this can provide you with added estate planning flexibility.

5 - Surplus Pension Income Can Fund Super ContributionsTTR

In some cases, you may find the TTR pension provides surplus income to your needs. This income could obviously be spent if you choose, however with the changes to contributions laws you now have the option to make additional contributions back into super.

Both after tax and tax deductible contributions can now be made by everyone with earned income in Australia. This means that you now have the opportunity to fully utilise your super caps to maximise the amount you invest into super. 

Any excess income from a TTR pension, which is paid to you before tax, can be contributed back into super. In some cases, you may even be able to claim a tax deduction for the contribution which can help to reduce your taxable income.

6 - Use Surplus Pension Income to Reduce Personal Loans

Surplus income from your TTR pension could also be used to help you with your debt repayments. An offset account could also be used to hold your payments for the year offsetting your mortgage debt.

This could essentially give you a tax free return equivalent to the interest rate of your mortgage for the period.

Additionally, you would still have the ability to utilise strategies like Super Contributions and Pension Rebooting to increase the benefit that you receive from this style of planning.


Getting Started Early is the Key

One of the key takeaways from the changes to the TTR pension rules is that any benefit you can obtain from the strategy is determined by your personal circumstances.

If you want to reduce your hours of work and maintain your level of income, then a TTR pension may be just the ticket.

If you’re looking to pay down debt, build wealth and manage your personal tax towards a retirement goal, then a TTR pension may well figure in your plans.

With the complexity surrounding retirement planning however it’s crucial that you evaluate your options early so that the optimal strategy can be put in place to achieve your desired retirement outcomes.


If you are starting to consider your retirement and need some assistance from a team of specialists who have been involved with pre-retirement planning for over 90 years then we encourage you to contact the retirement specialists at RSMWe will walk you through the specific strategies relevant to you, assess your circumstances to see what is appropriate and tailor the solution to meet your needs.

Contact an RSM specialist >>

 

This article has been prepared by RSM Financial Services Australia Pty Ltd ABN 22 009 176 354, AFS Licence No. 238282.

As everyone's circumstances are different and this article doesn't take into account your personal situation, it is important that you consider the above in light of your financial situation, needs and objectives, and seek financial advice before implementing a strategy.
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