Our July blog on Uncertain Times for Super struck a chord with readers who are definitely interested in being kept up-to-date with the changes to superannuation announced in the Federal budget on 3 May.

One particular area of interest has been how the changes will affect Transition to Retirement (TTR) superannuation pensions.

Transition to retirement pensions

Traditionally, most people worked full-time up until the day they retired but over time more and more of us have wanted a less abrupt transition to retirement. We want to keep working, but not necessarily full-time in the lead-up to retirement.

However, less work means less money and less disposable income which historically made the transition to retirement approach inaccessible to many Australians. To address this, changes to superannuation policy over time have allowed people to access a portion of their superannuation as a TTR pension which serves to boost their overall disposable income, even while they are working fewer hours.

While TTR pensions (which are a type of what is also called an allocated pension) were originally designed as a mechanism to allow older working Australians to stay in the workforce on a part-time basis but still achieve their income requirements, TTR super pensions are now accessible to all Australians whether they are working full or part-time.

To set up a TTR pension you must have reached what is called your superannuation preservation age (the age at which you can start withdrawing super). A person’s preservation age ranges from 55 to 60, depending on their date of birth.

Once a TTR pension is established there is a requirement to withdraw a minimum amount from the pension each financial year (four percent for those under 65 years). The maximum amount that can be withdrawn per financial year is 10 per cent. In most cases, you cannot convert your TTR pension into a lump sum unless you retire, turn 65 or satisfy other conditions.

TTR  pensions are only available for members of accumulation super funds. Members of defined benefit funds cannot access a TTR pension.

The tax benefits of transition to retirement pensions

While TTR pensions are an excellent way to boost your disposable income, they also provide the opportunity to take advantage of a range of significant tax benefits.

Because you are continuing to work you continue to enjoy the tax advantage of your employer Super Guarantee contributions and any salary sacrificed contributions you make being taxed at the low rate of only 15 per cent when they go into super. This is likely to be much lower than your marginal tax rate. In addition, because you are salary sacrificing into super, your overall taxable income will be reduced.

Federal budget changes to superannuation and TTR pensions

Some of the changes to super announced in the Federal budget do affect TTR pensions, but be reassured that despite these changes, TTR super pensions remain highly worthwhile and effective.

One of the changes that will impact on TTR  pensions is that from 1 July 2017 the government will remove the tax exemption on investment earnings from TTR pensions, meaning they will be taxed at 15 per cent, in line with the 15 per cent tax on investment earnings on super assets.

However, other tax benefits remain in place including the fact that once you turn 60 all income arising from your TTR pension becomes tax-free and non-assessable.

Conducting an annual review of your TTR  pension

Your superannuation balance is always changing due to the amounts being contributed via employer Super Guarantee contributions and salary sacrificing. In addition, those with a TTR super pension are also constantly making withdrawals from their super.

To ensure your contributions are at the right level to maximise the tax advantages superannuation offers, Falconer Advisers suggests to all clients that they conduct an annual superannuation review. By conducting such a review with your financial adviser you will ensure you are kept up-to-date with any changes to the law that impact on superannuation and that your approach to your super forms part of an overall integrated financial planning.

To find out about the full range of potential tax benefits associated with TTR pensions, to organise a time to conduct your annual super review or if you have any other financial planning questions, call me on 03 6234 2233 or email glynn@falconeradvisers.com.au