A transition to retirement pension (sometimes referred to as TTR) allows you to transfer part of your superannuation funds into a transition to retirement account and draw a tax-free income if you are over 60 and under 65. Pro-Tip: This is not for everyone! If you are short on cash, it is useful. If you are not, this can leave you in a worse tax position.
If you are aged between 60 and 65, you can do a transition-to-retirement strategy rather than fully retiring. This allows you to take 4-10% of your savings annually while still working and presumably cutting back your working hours .
BUT! Keep in mind that if you have enough money, then you probably don't want to do this. This is taking money out of super (where it will be tax-free when you move into pension phase) and putting it into your own name, where it is taxed.
Most people want to do the opposite while 60-65.
Reasons to do a Transition to Retirement strategy:
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You want to move to part-time work but can't meet your ongoing expenses without drawing down on superannuation.
- You have some unused concessional caps but you don't have the cashflow to use them unless you start drawing down on your superannuation. i.e. you are effectively taking money out of super so that you have enough cash to put money back in.
- You want to borrow money to buy a property and can't get a loan
- You have a major expense and need to access your superannuation
I will talk about these options below.
How does the transition to retirement strategy work
Key features:
- Investment earnings in the transition to retirement are still taxed at a maximum of 15%, the same as the accumulation phase.
- In a transition to retirement account, you are required to withdraw a minimum of 4% p.a. and a maximum of 10% p.a. of the balance each year.
- The withdrawals are calculated on the 1st of July each year and can only be taken as an income stream; you cannot withdraw lump sums.
- If you are over 60 years old, the pension payments are tax-free.
- When you turn 65, your TTR account automatically turns into a full account based pension.
If you are under 60 years old, it is a lot more complicated. It can be useful if you genuinely want to scale back the amount of work you do and transition to retirement. But for most people, it's not worth doing. See ‘appendix’ for more detail.
Examples of how to use a transition to retirement
Let's assume Harry is 60, earns $100,000 p.a. and has $400,000 in his super. He receives $12,000 (12% 2025/26 financial year) in compulsory superannuation contributions each year.
In the options below, Harry opens a transition to retirement account and transfers $350,000 to the TTR account, and leaves $50,000 in his accumulation account to fund his insurance and to receive his employer contributions (you cannot pay for insurance premiums from a transition to retirement account).
Harry can withdraw a minimum of $14,000 p.a. (4%) and a maximum of $35,000 p.a. (10%) from this account.
Option 1: reduce work hours and maintain income
In this example, Harry wants to gradually transition to retirement and cut back his work hours.
He wants to cut back to four days of work per week. This will reduce his taxable income by 1/5th. The after-tax effect will be a reduction in salary of $13,100.
Harry chooses to withdraw the minimum 4% drawdown of $14,000.
Harry has ended up with slightly more income than he would have had after-tax working one day less per week.
He can do this each year until he turns 65. Then the transition to retirement will turn into a pension account, and then all the earnings and capital gains will be tax-free, along with unrestricted access.
Option 2: save on tax and boost your overall wealth if you have available caps but no cash
Harry wants to continue working full-time. He has available concessional caps, but does not have money outside of super to use these caps. He can save tax and boost his overall wealth through a transition to retirement strategy.
Harry opens a transition to retirement account and transfers $350,000 to the transition to retirement account. He leaves $50,000 in his accumulation account to fund his insurance and to receive his employer contributions.
Harry can contribute an additional $18,000 per year of concessional contributions to his super accumulation account in order to utilise any unused concessional contributions up to the $30,000 cap. Harry also has $85,000 in catch-up contributions available as he hasn't made extra contributions in the last five years.
In year one, Harry chooses to withdraw the maximum $35,000 (10%) p.a. tax-free from his transition to retirement account as an income stream. He makes a personal deductible concessional contribution of $35,000. The effect of this is:
- This reduces his taxable income from $100,000 to $65,000
- Harry will save $12,100 of tax on his personal income because of this decrease
- However, there is a 15% contributions tax for concessional contributions into super = $5,250.
- Therefore, the net tax saving of the strategy is $6,850 ($12,100 - $5,250) in the first year.
In year two, let's assume there has been minimal growth in his fund and Harry’s total super balance is well below the $500,000 and he can utilise the catch-up contributions. If his balance is less than $465,000 he can take advantage of the full catch-up contributions of $35,000 and make the same tax savings of $6,850.
In year three, let's assume he does not have the $35,000 of catchup contribution available and his balance is getting close to the $500,000 mark; where he is no longer able to take advantage of catch-up contributions. He can withdraw any amount between $14,000 and $35,000 that he chooses and make a personal deductible contribution and claim the tax deduction and benefit from the tax savings.
In year four and year five of the transition to retirement pension, let's assume Harry's total super balance is more than $500,000. He can still do the strategy with his $17,000 unused concessional contributions each year to bring him up to the $27,500 cap. However, he can no longer take advantage of the catch-up contributions as his balance exceeds $500,000.
The overall tax saving of the strategy is $3,615 in year four and in year five.
Importantly, this strategy depends on your marginal tax rate. At a lower salary, this strategy may only generate marginal benefits. At a higher salary, the strategy will generate higher tax savings. On the maximum tax rate, the tax savings (including the medicare levy) can be as high as 32c in the dollar.
Importantly, though, if Harry had money outside of superannuation, he would likely have been better off simply staying in accumulation and transferring the money from outside of super into super, where it would be tax-free once he converts it to a pension.
As you can see, there are considerable tax savings on offer if you understand how to utilise the strategy. It is always best to speak to a financial adviser before engaging in any strategy.
Option 3: Use money to top up a property purchase
It can be hard to get a loan from a bank when you are close to retirement. Say Harry was recently divorced, looking to buy a new house and is $50,000 short and can't get a loan because the bank is not expecting him to be working.
Harry could start a TTR in (say) March with $350,000 as above. Then he can draw down the maximum $35,000 before 30 June. Then, in July he could draw down the final $15,000 and pay for the house.
The thing to note is that sometimes a bank won't lend money for a good reason - maybe Harry shouldn't have a mortgage or should look at a cheaper house. You will need to consider your own situation.
Option 4: Use money for a major expense
Note, you can already access money from your superannuation if you are in financial hardship or on compassionate grounds. Importantly, if you are over 60, then it is generally tax-free anyway. i.e. you will not need a transition to retirement strategy.
If this does not apply, or you are rejected, you may be able to use a transition-to-retirement strategy to access the money.
The disclaimer this time is that there is probably only a narrow set of circumstances where you can't get compassionate grounds but that it also makes financial sense to do so. Wanting (say) to get the latest car to impress your neighbour or to send money to help out a Nigerian Prince might be allowed, but you probably shouldn't be doing it.
Maybe helping a friend/relative with medical problems who doesn't qualify as a dependent might be a valid reason. But first, take care you are not getting scammed. Is this is an internet friend who you have never met in person? It is likely a scam.
Disadvantages and risks of a transition to retirement strategy
The main disadvantage is you have to have two accounts open. That means two sets of fees and some extra administration for the two accounts. You need to have your accumulation account to receive compulsory superannuation contributions and your transition to retirement pension account to pay the pension income stream. However, the tax-saving benefits typically far outweigh the disadvantages.
This article gives you a good overview of the strategy. However, there are other factors to consider, like your investment strategy and sequencing risk, before commencing a transition to retirement strategy. Always seek the guidance of a licensed financial adviser.
Appendix: Transition to retirement for under 60s
For most people this is not an option, but you may genuinely want to retire early.
If you have met your preservation age and are under 60, you can still open a transition to retirement account.
Importantly, the income stream is not tax-free. You pay tax at your marginal tax rate on the income received and get a 15% tax offset.
There are also implications depending on whether contributions over the life of the fund are taxable components (Employer contributions, salary sacrifice or personal deductible contributions) or tax-free components (non-concessional contributions). It is always best to speak to a financial adviser before employing one of these strategies.
