MONEY | No 'one size fits all' strategy for transition to retirement pensions

When should you to leave your super in accumulation mode, build your assets further, or start your transition to retirement pension? Picture: Shutterstock.
When should you to leave your super in accumulation mode, build your assets further, or start your transition to retirement pension? Picture: Shutterstock.

Transition to Retirement Pensions (TTRs) were introduced in tandem with the Howard-Costello reform of the superannuation system.

Australia was facing a growing skill shortage, with the oldest baby boomers celebrating their 60th birthdays - and as more and more of them retired, the difficulty of finding replacements was growing.

At the same time, many older workers wanted to cut down on their hours and were happy to accept a reduced wage for doing so, but they did not want to give up work completely.

Their problem was access to super. Even though withdrawals from super became tax free from age 60, employees could not access their super until preservation age (55 if born before July 1, 1960) unless they were prepared to sign a statement that they were permanently retired. And once they reached 60 they had to resign from a job to access their super.

The essence of a TTR is that you start a pension from your superannuation fund once you reach your preservation age. This gives you partial access to your super, even though you have not satisfied a condition of release such as retirement, which would enable you to withdraw your funds when you wished.

If you reach your preservation age, and want to keep working, the decision will be whether to stay in the accumulation fund and build your assets further, or start a TTR.

Let's consider these options one by one. First, the advantage of the TTR is access to your super before you retire - the price is the compulsory withdrawal of at least 4 per cent of the balance each year. Irrespective of the choice you make, your fund will continue to pay 15 per cent tax on its earnings.

If you leave your money in accumulation mode, the tax treatment will be the same as if you had a TTR, but there is no requirement to make withdrawals.

Mary is 60 and has been enjoying a TTR since she was 56. She is now partly retired and has had several casual jobs. Because she has reached 60, and has satisfied a condition of release by resigning from a paid job, she has gained full access to her super and can quit the TTR.

By doing this she will achieve higher net returns in her super fund, because she has moved to a tax-free fund. If you are in Mary's position, and have met a condition of release, make sure you tell your TTR provider so they can convert your fund to a normal account-based pension and apply the earnings tax exemption. If you don't do this your fund will keep paying tax on your monies.

Henry is 59 and is somewhat strapped for cash, as he was a late starter and his children are still in the expensive years. His wife is considerably younger than him, and her super is inaccessible because of her age. He intends to stay in his present job until he retires at 65, and is keen to access his superannuation sooner rather than later to help with the school fees. A TTR is the perfect vehicle for him as it enables him to access up to 4% of his superannuation balance immediately.

Helen, aged 58, is a career woman with substantial funds both inside and outside the superannuation environment. Being on her own she intends to work as long as she can. For her, the obvious strategy is to leave her superannuation in accumulation mode and salary sacrifice to the maximum. There is no point in taking money out unnecessarily.

These examples highlight the fact that there is no "one size fits all" strategy. As always, getting advice to optimise your financial affairs is the way to go.

Noel answers your money questions

Question: I'm a fit active retiree in my early sixties. My super balance is currently around $900,000 from which I draw a pension of $36,600 a year. I have no other investments or sources of income.

I own a one-bedroom unit in a central location. It is my home. Current market value around $400,000. I've lived in it for four years and it's just too small for me. I'm thinking of selling my unit and renting a place more suited to my needs. I like the flexibility of renting and there are some advantages. I'm reluctant to rent my place out while I rent somewhere else as it's money tied up and too much responsibility. There are also tax implications.

My question whether I should sell, then rent where I think I'd like to buy? I'm seriously considering not buying again as there is a huge cost and I can pay years of rent for the money tied up in a home not to mention maintenance costs. There is also the option to move on if there are issues with neighbours etc. House sitting is also a short-term option. I have heard horror stories of single older women becoming destitute.

Answer: Single older women who become destitute are normally those who end up at retirement age with no home of their own, and few financial assets. As a result, they are forced to exist on the single pension which is just $472 a week from which they have to pay costs of accommodation. I believe that owning your own place should be a priority, especially as it gives you preferential treatment from Centrelink as your own home is exempt.

I have no problem with your renting a property after you sell your home, but you should still have a major goal of buying another home in the medium term. It's a great idea to rent in an area where you think you would like to live eventually, and this would give you time to explore the market, to find out if there are suitable properties in your price range.

If you bought a place for say $800,000 as a hedge against future price rises, you could still rent or house sit until you were comfortable to move into the new property. This would then reduce your superannuation to $500,000 which would be getting you close to the cut-off asset test for a single person. Of course, you would not be eligible for any pension until you reached pensionable age, and had moved into the new property.

Question:I have been thinking about salary sacrificing into my superannuation rather paying extra off the mortgage. Unfortunately, I am 63 years old and still work full time. My husband is 59 years of age and self employed.

I do salary sacrifice a small amount and wonder if for the next couple of years I should increase this rather than paying extra off the mortgage. Is it a fact that the limit to pay into superannuation each year is only $25,000?

Answer: It's a fantastic idea to maximise your concessional contributions because at your age lack of access is not an issue. The strategy works because such contributions lose just 15%, where the money taken in your pay packet loses tax at your marginal rate. Concessional contributions from all sources, including the employer contribution, cannot exceed $25,000 a year.

Question:I have a small pension from Centrelink with assets (shares) fluctuating above and below the cut off for a single homeowner. My income is well below the allowable amount.

Can you tell me ( and maybe others in an article for your Q&A column) what does Centrelink do if I am below the cut off one week and then above the cutoff for some days and then below again, continually.

I can only gift $10000 to family but gains/losses can be more than this on any one day. I would appreciate your advice.

Answer: Services Australia General Manager Hank Jongen, says "Each year in March and September, we revalue pension customers' managed investments, shares and securities, to reduce the impact of share fluctuations on their eligibility for a pension and their payment rate.

Due to the impacts to financial markets caused by the coronavirus, we undertook an additional revaluation in June this year.

If your reader feels their assets have significantly changed or don't reflect the current market conditions, they can request a revaluation at any time. However, we'll revalue all their investments at the same time, meaning we cannot revalue just one type of share or managed investment.

Your reader may find that this causes an overall increase to the value of their investment portfolio".

You can also use your Centrelink online account to remove, add or update their managed investments, shares and superannuation. After you make these updates, Centrelink will let you know if extra information is needed.

Question: In a recent article you mentioned that a person need not elect to nominate which home is their principal residence until a decision is made to sell one of them. In this regard what impact does the issue of land tax have on this situation?

Answer: Land tax is a state tax and is levied on properties except for those for which the owners have claimed an exemption because they are living in it. It does not affect the capital gains tax position.

  • Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. noel@noelwhittaker.com.au