The super product that can help you relax… and pay less tax.

By Thomas Kidd

The transition to retirement pension (TTR, sometimes referred to as a TRIS) was introduced by the Australian government in 2004, as part of their effort to provide more flexible retirement options for the country’s aging population. The purpose, as the name suggests, was to allow older Australians to access their super benefits before they had fully retired, as a way to maintain their level of income while reducing the hours they work. Although this is an effective way that many people use the TTR, there is another surprising benefit that can be captured by members who are eligible for a TTR, but still working full-time. In this article, we break down these two common ways the TTR is used as part of a retirement plan.

The Lifestyle Focus

As mentioned above, this is the common understanding of the TTR; you go part-time at work and supplement the foregone income using your super savings. We call this the lifestyle focus because that is the major benefit of this strategy; giving yourself more time to do the things you enjoy in life. Of course, establishing a TTR may mean drawing down on your super earlier than anticipated, and you should consider how this will affect the longevity of your retirement savings. But conversely, a TTR can help some people to continue to work for longer without burning themselves out, which could mean improving their position in the long run. Suffice to say, this can be a delicate balancing act, and you should think carefully about these implications before diving in.

The Tax Focus

The other, less commonly known benefit of a TTR is as a tool for reducing one’s tax liability. As you may know, making salary sacrifice contributions to super or making tax-deductible contributions can be a tax effective way to save for retirement. The main downside with these strategies is that it reduces your take-home-pay and any funds put into super generally cannot be accessed until you retire. For this reason, many find it a difficult choice to top up their super, because they know they won’t be able to access their super funds for many years. However, a TTR pension can provide tax-effective income to make up this shortfall. Essentially, this lets you reduce your tax without cutting into your paycheque!

Of course, it’s not that simple…

Although this may sound enticing, the reality is a little more complicated.

Cashflow management: If you use your TTR to draw down the amount you want to contribute to super, you may as a result be increasing your cash position and diminishing your super. How will this affect your retirement savings?

Drawdown limits: There are some limitations that apply to a TTR that are unlike other retirement income products. Drawing too much can increase your tax liability and may render this strategy ineffective.

Contribution limits: There are of course limits to how much you can contribute to super and claim a deduction on, which may be affected by your income, the balance of your super, and contributions you’ve made in previous years.

Finding the balance between these many factors can be difficult, and we recommend seeking professional financial advice if you’re interested in pursuing this strategy.

Thomas Kidd in an authorised representative of Alliance Wealth Pty Ltd. (AR: 001292328)