5 Costly Transition to Retirement (TTR) Mistakes to Avoid

The Transition to Retirement (TTR) strategy can be a fantastic way to ease into your later years, allowing you to access your super while you're still working. However, after a decade working as a financial planner, I've also seen this wonderful strategy backfire when not done correctly.

These aren't minor administrative errors; they can be costly and sometimes irreversible. This guide will walk you through five of the most common mistakes people make with a TTR strategy and share easy tips to help you avoid them.

Disclaimer: This information is for educational purposes only and is not financial advice. Superannuation and tax rules are complex. Please do your own research and seek professional advice before making any decisions.

Mistake 1: Forgetting to Lodge Your 'Notice of Intent'

This is the most common and costly mistake of all. Many people use a TTR strategy in combination with making a personal deductible super contribution. The idea is to claim a tax deduction on the contribution to lower your taxable income, while drawing a tax-free income from the TTR pension to top up your savings.

The catch is this: you must lodge a valid "Notice of Intent to Claim a Tax Deduction" with your super fund before you transfer money from your accumulation account into a TTR pension.

If you start the pension first, you will not be able to claim the tax deduction. You will miss out on those valuable tax savings, and this mistake cannot be undone.

Don't assume the process is complete just by notifying your fund. You must receive an acknowledgement from them. Whether it's a letter, a text, or an online notification, make sure you get it. To be extra safe, you can log in to your super account and double-check that the 15% contributions tax has actually been deducted from your contribution.

Mistake 2: Ignoring the Impact on Centrelink Benefits

The way Centrelink assesses your super changes dramatically when you start a TTR pension, and many people are caught off guard.

• Accumulation Account: If you are under the Age Pension age (currently 67), your super in an accumulation account is not assessed by Centrelink under the assets or income tests.
• TTR Pension: A TTR pension account is always assessed under both tests, regardless of your age.

If you or your spouse are receiving Centrelink benefits, moving money from a non-assessable accumulation account into a TTR pension will increase your assessable assets and income, which could significantly reduce your Centrelink payments. Always calculate whether the benefits of the TTR strategy outweigh the potential reduction in your Centrelink entitlements.

If the impact is negative, you can always roll the TTR pension back into an accumulation account (if you're under 67) to keep those assets out of Centrelink's view.

Mistake 3: Accidentally Closing Your Super Accumulation Account

This often happens when people try to maximise their TTR pension by transferring their entire accumulation balance over. This closes the accumulation account and can have two devastating unintended consequences.

• No Account for Contributions: If you're still working, you need an open accumulation account to receive employer contributions. While you can always open a new one, it's an unnecessary administrative hassle.
• Cancelling Your Insurance: This is the irreversible and potentially life-altering mistake. Closing your accumulation account will cancel any insurance cover held within it, such as life insurance or total and permanent disability (TPD) insurance.

I once knew someone with stage 3 bowel cancer who, in his effort to maximise his TTR pension, accidentally cancelled his life insurance. The realisation that he had unintentionally taken away a significant part of what he wanted to leave for his kids was devastating.

To avoid this, always leave a small balance in your accumulation account to keep it open and to cover your insurance premiums.

Mistake 4: Drawing Too Much, Or Too Little

It's surprisingly common for people to get their TTR pension withdrawal rate wrong. Spenders tend to draw too much, while savers often hold back too much.

• Drawing Too Much: If you start drawing down your super too aggressively, you risk running out of money before you run out of life. The Age Pension may be your only safety net, and for many, it isn't enough.
• Drawing Too Little: If you delay withdrawals and hold back on enjoying your savings, your golden years of good health and free time could pass you by. As one saying goes, you didn't waste your money, but you wasted your life.

It's all about finding the right balance. It's okay to spend more during your active early years of retirement, but stay mindful of potential aged care needs later in life. Keep this "smile pattern" of retirement spending in mind when deciding how much to withdraw.

Mistake 5: Not Realising There’s a Better Strategy

A TTR pension is a great tool, but for many people, there is a far better option available once they meet a full "condition of release." This is a specific event that gives you unrestricted access to your super, such as:

• Turning 65 (even if you're still working).
• Retiring permanently from the workforce after age 60.
• Ceasing an employment arrangement after turning 60.

Once you meet one of these conditions, you can move your money from a TTR pension into a full account-based pension. The benefits are huge.

• The 10% annual withdrawal limit is lifted.
• Most importantly, the 15% tax on investment earnings is removed. Your investment earnings become completely tax-free.

Let's put that in perspective. On a $1 million balance with a 7% annual return, you would pay $10,500 in tax each year in an accumulation account or a TTR pension. In an account-based pension, you pay zero. Over a 30-year retirement, that tax saving, compounded year after year, can add up to a major uplift in your retirement income.

If you are approaching or are over age 60, it's crucial to understand when you might meet a condition of release. Don't leave tens of thousands of dollars on the table by staying in a TTR pension when a tax-free account-based pension is available to you.