Transition to Retirement: Strategies From Age 60

01 What a TTR pension is

A transition-to-retirement income stream is a pension you start from your super once you reach preservation age (60) while you're still working. Unlike a normal account-based pension, you don't need to have retired. You must draw between 4% and 10% of the balance each year — a minimum to make it a genuine income stream, and a 10% maximum because you haven't fully retired. It's a way to access some super early without leaving work.

Most of what is written about transition to retirement predates 1 July 2017, when earnings inside a TTR pension became taxable at 15% rather than exempt. Advice still in circulation describes the pre-2017 version, where the tax-free earnings did much of the work — and someone modelling it on those numbers will overstate the benefit substantially. The strategy still works for higher earners with cap room, but through the contributions-tax arbitrage alone.

On the defaults above, the worked example shows: You can draw between $16,000 (4% minimum) and $40,000 (10% maximum) from a TTR pension this year while still working.

Source: ATO — Transition to retirement

02 Strategy one: scale back work

The most straightforward use is reducing your hours without reducing your income. Drop from five days to three, and replace the lost salary by drawing from the TTR pension.

What that buys is not primarily financial. It lets you test whether you are ready to stop — which is a genuinely hard thing to know in advance, and an expensive thing to get wrong in either direction. Retiring and discovering you are bored is difficult to reverse once the role is filled; working three more years you did not need to is unrecoverable.

It also keeps super contributions flowing. Part-time work still attracts Super Guarantee, so the balance keeps receiving employer contributions while the pension draws from it. The two partly offset, which is the point: you are converting some of the balance into current income rather than spending it down outright.

For many people this is the real value of TTR, and it has nothing to do with tax. It is a gradual off-ramp instead of a cliff edge, available from 60, with no requirement to declare that you have retired or to commit to anything you cannot undo.

Source: ATO — Transition to retirement

03 Strategy two: boost super while still working

The second use keeps you working full-time and restructures your pay for tax. You salary sacrifice a larger share of salary into super, where it is taxed at 15%, and replace the reduced take-home pay with TTR pension payments, which are tax-free from 60.

The gain is the gap between your marginal rate and 15%, applied to whatever you can move. Someone on the 39% bracket sacrificing an extra $20,000 saves about $4,800 of tax in the year, and takes home roughly the same amount as before because the pension payments replace the lost salary. Nothing about their spending changes; the money simply arrives having been taxed less.

Two things bound it. The concessional cap of $30,000 includes employer Super Guarantee, so the room available for extra sacrifice is smaller than the cap suggests — often $12,000 to $15,000 for someone on a good salary. And the TTR pension itself is capped at 10% of the balance a year, so the balance has to be large enough to fund the replacement income.

This strategy was considerably more powerful before 1 July 2017, when earnings inside a TTR pension were tax-free. They are now taxed at 15%, the same as accumulation, so the benefit is smaller — but for higher earners with cap room it can still clear the cost of running it.

Source: ATO — Transition to retirement

04 The tax angle after 60

Two tax facts shape every TTR strategy, and confusing them is the most common error in this area.

The first: pension payments from a TTR are tax-free once you are 60 or over. That is what makes both strategies work — the income arriving in your hand has no tax on it, which is what lets it replace sacrificed salary dollar for dollar.

The second, and this is the post-2017 change: the investment earnings inside a TTR pension are taxed at 15%, exactly as in accumulation phase. They are not tax-free the way a genuine retirement-phase pension's earnings are. So a TTR does not give you the tax-free earnings of full retirement; it gives you early access to tax-free payments while you keep working.

When you do fully retire, or turn 65, the TTR converts to a retirement-phase pension and the earnings become tax-free at that point — which is also when the transfer balance cap starts to apply to it. The question of when that moment should arrive is worked through in When Can I Retire in Australia.

Source: ATO — Transition to retirement

05 Who it suits — and the cautions

TTR suits two distinct groups: people 60 and over who want to reduce hours, and higher earners with genuine room in the concessional cap who want to move income into super tax-effectively. If you are in neither group, it is probably not for you.

The cautions are real. The tax-boost strategy is materially weaker than the pre-2017 material still circulating suggests, and running a pension account alongside accumulation carries administration and often a second set of fees — the benefit has to clear that cost before it is worth doing, and on a modest balance it frequently does not.

Drawing down super while still working also reduces your final balance unless the drawdown is matched by extra contributions. The scale-back strategy accepts that trade deliberately; the tax strategy only works if the sacrifice genuinely exceeds the pension payments. Running the tax version without increasing contributions is simply spending your super early with extra steps.

And it interacts with the caps in a way that is easy to get wrong. Over-sacrificing past $30,000 triggers excess contributions tax at your marginal rate plus an interest charge, which can wipe out a year's benefit in one transaction. Model it with your actual salary, Super Guarantee and balance before assuming it pays.

Source: ASIC Moneysmart — Transition to retirement