Transition to retirement still worthwhile – but not for the tax perks

There has been a lot of commentary recently about the watered-down tax benefit of taking a transition to retirement pension. From July 1, the income stream you can access while under 65 and still working no longer has the benefit of the earnings inside the super fund being tax free. This means that if you want to gradually scale down your work in your late 50s or early 60s and supplement your income from super, there is limited tax incentive to take a transition-to-retirement (TTR) pension.

However, there are some compelling reasons why a TTR income stream might still be for you.

Your 50s can be a time to try new things in work and leisure. Photo: Wolter Peeters

1. Preservation

If you have reached your preservation age (between 55 and 60 depending on when you were born), you will not automatically have access to your super. You also need to meet what is known as a condition of release, the most common of which is permanent retirement. Without this, you will not be able to take lump sum withdrawals unless you have non-preserved benefits in your fund. This is where a TTR pension bridges the gap. You can commence a TTR and take up to 10 per cent a year of your fund balance even if you are still working. This means that the choice between working and retirement is not binary – you can do a little of both.

2.  Life satisfaction

Many of us spend the early years of our career meeting the basic needs on Maslow’s hierarchy – we use work as a means to provide food, shelter, education for ourselves and our family. Many of us spend years working hard at jobs we don’t necessarily love, to pay the bills. This is what Aristotle described as “poiesis”, activity aimed at production or outcome. But there is also value in what the ancient Greek philosopher called “praxis”, activity done for its own sake, or without known outcome. The freedom that comes with age, having children who are grown up and a paid off mortgage, is the possibility that work can shift from necessity to something that you do for enjoyment and satisfaction alone. An income independent of your work itself, such as a supplemental superannuation income stream, can give you this freedom to explore new ideas and passions without the worry of the impact of taking a big pay cut to do so. Not only does this offer the prospect of increased life satisfaction, but working on something you love may also mean you ultimately work longer. This might mean that dipping into a little bit of your super now via a TTR pension, may mean that you defer accessing the bulk of your benefits and preserve its long-term value.

3. Changing work

The nature of work is changing rapidly with increasing part-time and casual positions across all age groups but most particularly for those aged under 35 and over 55. This can offer wonderful flexibility for both employers and workers, but the unpredictability of income can be an issue, particularly if you are starting out as a freelancer or contractor. If you are lucky enough to have accumulated a solid superannuation balance, you can use a TTR pension to smooth your income over the course of a year or several years. So long as you meet the minimum required payment and do not exceed the maximum 10 per cent each year, you can vary your payments as much as you like. You can even stop the pension all together if you no longer need the income.

Superannuation is a precious resource and as life expectancy increases, it is critical that we preserve it for when we really need it. With many Australians approaching retirement with insufficient savings, we need to think carefully about whether accessing superannuation before full retirement is the best choice. However, as a community, holding onto the skills, knowledge and experience of our older workers is an excellent way to support our economy to thrive. So, if starting a TTR income from super means that you extend the period over which you can, and want to work, it can be a very smart choice.

Catherine Robson is an award-winning financial planner with Affinity Private. Twitter:@CatherineAtAff.