How transition to retirement can help you eliminate debt and boost your superannuation

It’s a common strategy championed by financial advisers and already used by many Starts at 60 fans. Commence an account-based pension while still working and use the cash flow to top-up your superannuation or pay off debt.

Called Transition To Retirement or TTR for short, the tax calculations stack up for most and the strategy could see you completely debt free, sooner than you thought.

The concept of tapping into your super this way dates back to the Howard era of politics when youth unemployment was sky-high. The theory was that older Australians could reduce their hours to make room for younger employees. The silver haired devils could top up their reduced employment income with payments from super.

To able be to commence a TTR, you need to have reached preservation age which is now 60. At the time TTR was introduced, 55 year olds could access their super this way.

60 is coincidentally and fortunately, the age where withdrawals from most taxed superannuation funds are completely tax free.

A taxed super fund covers almost all super funds with a few notable exceptions. Both state and federal government employees who joined the public service before certain dates will be members of untaxed funds which have added complications.

In a nutshell, you would need to terminate your untaxed scheme to access this strategy.

Under the TTR arrangements, a person can roll their entire Super balance into a TTR Account Based Pension fund. In a practical sense, you would leave a small amount in the accumulation fund, so that future contributions have somewhere to go.

Once in the ABP, you need to be aware of certain rules that are unique to a TTR set-up.

Firstly, investment earnings within the fund will still be taxed at 15 percent which is the same rate as money in accumulation phase.

Next, you are required take out the minimum aged based amount, but the maximum amount you can access is 10 percent of the account balance.

For example, a 60 year old person who transfers $500,000 into a TTR fund must take out at least 4 percent of the account balance or $20,000 per annum but could access $50,000. And because they must be over 60 years of age, that $50,000 is tax-free. You could dump that $50,000 straight into your home loan and save yourself about 6 percent on the interest you are paying on the mortgage.

If you are lucky enough to be debt free, you can also consider a strategy where tax-free regular payments from the TTR cover some or all of your cost of living.

That then means that a large chunk of your salary can be redirected to superannuation.

The simplest way is to do it through Salary Sacrifice, where you ask your employer to redirect some of your pay into superannuation before your income tax is calculated.

Because Salary Sacrifice payments are concessional contributions to super, the super fund will need to pay 15 percent contributions tax on your behalf. But 15 percent is much better than say the 32 percent income tax and Medicare levy you would have paid if you had received that same money in-the-hand.

Also be aware of the annual contribution cap of $30,000 per annum which includes your employer’s 11.5 percent compulsory super, your salary sacrificed payments and any tax-deductible personal lump sum contributions you make.

Once you satisfy a normal condition of release, that same TTR fund can become a conventional Account Based Pension fund.

If you cease “gainful employment since reaching 60”, you can advise your ABP fund manager. From that point, there is no tax on the earnings and the 10 percent maximum withdrawal restriction is removed.

While all this looks and sounds simple enough, just be aware of fees and charges that could impact the overall viability of restructuring your super this way.

For example, if you end up paying $10,000 in fees for advice and setup costs, that could swamp a $7,000 saving in tax.

Your first starting point may be to contact your super fund directly, to see if they can help you set one up.

IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.