Transition to retirement — how it works and whether it is right for you

This article is for general information only and does not constitute financial advice. Superannuation rules are subject to change. Please consult a licensed financial adviser before making decisions about your super or retirement income.

Transition to retirement or TTR is one of the lesser-known features of the Australian superannuation system. For the right person in the right circumstances, it can provide genuine flexibility in how you approach the years between your mid-50s and full retirement. But it is also frequently misunderstood and sometimes oversold.

Here is a clear-eyed look at what TTR actually involves.

What transition to retirement means

Once you reach your preservation age (between 55 and 60, depending on your date of birth), you can access a limited income stream from your super while you are still working. This is the TTR income stream.

The key rules:

• You can draw between 4% and 10% of your TTR account balance per financial year as an income payment
• You cannot withdraw a lump sum under TTR, only regular income payments
• The strategy does not affect your ability to continue making contributions to super — employer contributions and any salary sacrifice continue as normal
• Once you meet a full condition of release (retiring after preservation age, or turning 65), your TTR account converts to a normal account-based pension with no upper limit on withdrawals

Why people use it — the traditional strategy

The classic TTR strategy involves drawing on your super income stream to replace some of the take-home pay lost through salary sacrifice contributions, effectively boosting your super contributions without reducing your take-home pay.

In simplified terms: you reduce your salary (via salary sacrifice into super), draw a TTR income stream to make up the difference in your take-home pay, and pay less income tax overall because salary sacrifice contributions are taxed at 15% rather than your marginal rate.

Whether this strategy actually improves your financial position depends on your marginal tax rate, your super balance, and how close you are to retirement. The ATO’s transition to retirement information is a good starting point for understanding the mechanics, but the numbers need to be modelled against your individual situation before drawing any conclusions.

The 2017 changes — what shifted

It is worth noting that the TTR rules changed significantly in July 2017. Prior to that date, TTR income streams received tax-free earnings treatment, which made the strategy more attractive. Since 2017, earnings within a TTR account are taxed at 15%, the same rate as an accumulation account which has reduced but not eliminated the potential benefits for many people.

If you read older information about TTR strategies, check whether it predates 2017, the numbers will not reflect the current rules.

When TTR makes sense

TTR tends to be most useful in three situations:

• You want to reduce your working hours but cannot afford the income reduction, the TTR income stream can help bridge the gap
• You are a higher income earner who can genuinely benefit from the tax differential between your marginal rate and the 15% super tax on salary sacrifice
• You want the psychological benefit of beginning to draw on your super while maintaining professional engagement, the shift in how you relate to your retirement savings can be useful in its own right

When it may not be worth the complexity

TTR adds administrative complexity to your financial life, an additional account, a tax return component, and the need to model the strategy carefully to ensure it is actually beneficial. For lower income earners, or those with smaller super balances, the benefits may not justify the complexity.

TTR is a tool, not a default. The question is whether it solves a specific problem you actually have and that is worth working through with a financial adviser before committing to it.

Getting the right advice

TTR is one of the areas where the value of personalised financial advice is clearest. A licensed adviser who specialises in retirement planning can model the strategy against your specific numbers and tell you definitively whether it makes sense. See Article 4 in this pillar for guidance on finding the right adviser, or browse the Next50 Expert directory for financial advisers who specialise in the 50+ transition.