In my last ten years working as a financial planner, the Transition to Retirement (TTR) strategy was my absolute favourite. It's widely applicable, highly effective in creating significant benefits for pre-retirees, and incredibly versatile. For many, it just doesn't make sense not to use it.
What’s even better? From the 1st of July 2024, this powerful strategy has become drastically simpler.
This guide will explain how the latest TTR strategy works and provide three practical examples to show how different retirement goals can be achieved. By the end, you'll have picked up a few new techniques to apply to your own retirement planning.
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 financial decisions.
The TTR Strategy Explained
- What is it? A strategy that lets you access your super as a tax-free income stream once you turn 60, while you're still working.
- How it works: You move super from an accumulation account to a TTR pension and draw between 4% and 10% of the balance each year.
- Goal 1: Work Less: Use the tax-free TTR income to replace your salary if you cut back your work hours.
- Goal 2: Save Tax: Combine salary sacrifice (to cut your tax bill) with TTR payments (to maintain your cash flow).
- Goal 3: Unlock Strategies: Use TTR withdrawals to manage your total super balance to qualify for other super rules, like the carry-forward contribution.
The Foundation: Understanding Your "Condition of Release"
Before diving into the strategy, it's essential to understand the concept of a superannuation "condition of release." This is simply the criteria you need to meet to access your super.
There are two main types for retirement planning:
- Full or Unrestricted Release: This means there is no cap on how much super you can access. You meet this condition if you are 65 or older, or if you retire permanently after reaching age 60.
- Partial or Restricted Release: This means there is a cap on how much you can draw from your super each year.
The TTR strategy is born out of this second, restricted category. From the 1st of July 2024, the rules have been simplified, and age 60 is now the key watershed moment. If you are over 60 but still working and don't yet meet one of the full release conditions, you can use the TTR strategy.
How Does the Transition to Retirement (TTR) Strategy Work?
The mechanics are incredibly simple.
- You use part or all of your super accumulation account to start a TTR pension.
- Once it's started, you must draw a pension payment between 4% and 10% of your TTR pension account balance each financial year.
- Because you are over 60, this pension income is completely tax-free.
The concept is simple, but the application is nothing short of remarkable.
3 Ways to Use the TTR Strategy: Real-Life Examples
Let's look at three different people with different goals, all of whom can benefit from a TTR strategy.
Example 1: Easing into Retirement (John)
John is 62 and wants to transition from full-time work to part-time, but he needs every cent of his current take-home pay to maintain his lifestyle.
- Full-time: His take-home pay is $43,462.
- Part-time (3 days/week): His take-home pay would drop to $28,412, leaving him with an income gap of $15,050.
By starting a TTR pension, John can draw $15,050 tax-free from his super to fill this gap. He gets to work less, maintain his lifestyle, and save $4,950 in personal income tax.
But he can do even better. By also salary sacrificing from his part-time wage, John can reduce his taxable income down to the effective tax-free threshold, meaning he pays zero personal income tax. He then simply draws a larger tax-free TTR pension to cover the bigger income gap. He still has the same take-home pay and works fewer hours, but now his total tax saving is $5,424.
Example 2: Minimising Your Tax Bill (Ann)
Ann is 60, loves her job, and earns $100,000 a year, but she is getting annoyed at how much tax she pays. She only needs $60,000 of her after-tax income to live on.
Ann can use a combination of salary sacrifice and a TTR pension to achieve her goal. The optimal strategy is to reduce her taxable income through contributions as much as possible, and then use the TTR pension to top up her income to the desired $60,000.
This strategy depends on two key factors:
- Her available concessional contribution cap: Ann can use the carry-forward rule to make a large contribution of up to $75,000 in FY25, which significantly reduces her taxable income and tax bill.
- Her super balance: She needs to have enough super to support the required TTR pension payment. The maximum she can draw is 10% of the TTR account balance.
Even if Ann's super balance isn't large enough to fully execute the optimal strategy, she can still use this combination to save a significant amount of tax, which in turn boosts her retirement savings.
Example 3: Unlocking Other Super Strategies (Dennis)
Dennis is 63 and plans to sell his investment property next financial year, which will create a large capital gain. He wants to use the carry-forward super contribution rule to make a large tax-deductible contribution to offset this gain.
However, to use this rule, his total super balance must be under $500,000 on the 30th of June of the prior year. Dennis is worried his balance will be just over this limit on the 30th of June 2025.
What can he do? Dennis can start a TTR pension in FY25 and deliberately draw the maximum 10% allowable withdrawal. This will shrink his total super balance, getting it just under the $500,000 threshold. This simple move in FY25 allows him to unlock the powerful carry-forward strategy in FY26 and save a huge amount on capital gains tax.
Before You Go...
The TTR strategy is incredibly versatile. But before you go, it's crucial to understand that if not done correctly, it can backfire. Make sure you read our guide on the common and costly mistakes people make when using the TTR strategy.
Avoid Common TTR Mistakes