Transition to Retirement strategy: NOT for everyone

A transition to retirement pension, or TTR, permits individuals over 60 and under 65 to move a portion of their superannuation funds into a TTR account for tax-free income. However, this strategy may not suit everyone. For those with sufficient funds, it could lead to a less favorable tax position. Those aged 60-65 can opt for a transition-to-retirement strategy instead of retiring fully, allowing them to withdraw 4-10% annually while continuing to work part-time.

Consider Harry, a 60-year-old earning $100,000 a year with $400,000 in his super. If Harry transfers $350,000 into a TTR account, he can withdraw between $14,000 and $35,000 annually, depending on his balance. In the example, Harry withdraws the minimum 4% of $14,000. This income reduction could lower his taxable income by about $13,100.

Harry can utilize his concessional contribution cap of $32,500 and $85,000 in catch-up contributions. In years one and two, assuming minimal growth, he can withdraw the maximum $35,000 tax-free. However, in year three, without the catch-up contribution, he may have to withdraw less. By year four, if his balance exceeds $500,000, he can still contribute to the cap of $32,500 but won't benefit from catch-up contributions. Overall, the strategy's tax savings depend on his marginal tax rate, reaching up to 32% of the dollar.

While this strategy offers significant tax advantages, it's crucial to consult a financial adviser before implementing it. For instance, if Harry was recently divorced, looking to buy a house, and needed a loan, he could use the TTR to access funds before his new mortgage obligation. However, banks may still be hesitant to lend to those close to retirement. Therefore, weighing the benefits and potential drawbacks is essential before deciding to pursue a transition to retirement strategy.