Super Strategies – top up your income when cutting back work

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If you plan to scale back your working hours, starting a transition to retirement pension could help you to  replace your reduced income.

How does the strategy work?

To use this strategy, you need to invest some of your super in a transition to retirement (TTR) pension. 

The key benefit of doing this is you can receive an income from the TTR pension to replace the income you’ll forgo when reducing your working hours.

Also, you’re likely to pay less tax on the income you receive from the TTR pension than you do on your salary or business income.

This is because even though the taxable income payments from a TTR pension are taxed at your marginal tax rate, they will attract a 15% tax offset between preservation age¹ and 59. Also, the income payments are tax-free² at age 60 or over.

As a result, you’ll generally need to draw less income from the TTR pension to replace your reduced salary, as the Case study below illustrates.

Other key considerations

There are some key issues you’ll need to consider before starting a TTR pension.
For example:

    • you’ll need to draw a minimum income each year, which is 2% of the account balance per annum in 2020/21 and 4% thereafter
    • you can’t draw more than 10% of the account balance each year, and
    • you can only take a cash lump sum (or purchase a different type of income stream) once you permanently retire, reach age 65 or meet another ‘condition of release’.
¹Preservation age is 55 for those born before 1 July 1960 and gradually increases to 60 depending on your date of birth.

Assumes the TTR pension is commenced from a taxed super fund.

Are you retiring?

If you have reached your preservation age and retire permanently (or meet another condition of release) you may be able to invest your super in an ordinary account based pension, rather than a TTR pension.

No tax will be payable by your fund on investment earnings in an account based pension, whereas earnings in a TTR pension are taxed at a maximum rate of 15%. 

Also, an account based pension is not subject to the maximum income and withdrawal restrictions associated with a TTR pension.

However, lifetime limits regulate how much you can transfer into an account based pension. In 2020/21, this limit is $1.6 million (subject to indexation). 

Case study

Mark, aged 58, works full-time, earns a salary of $80,000 pa (or $61,383 after tax) and has $400,000³ in super. He wants to cut back to a three-day working week.

While Mark’s salary will reduce to $48,000 pa, he doesn’t want to compromise his living standard.

To help him achieve his goals, his financial adviser suggests he invest his entire super benefit in a TTR pension and draw an income of $26,038 over the next 12 months.

By using this strategy, he’ll be able to replace his pay cut of $32,000 and continue to receive an after-tax income of $61,383 pa.

He will also pay $5,962 less tax. This is because the TTR income payments attract a 15% tax offset³, whereas his salary is fully taxable at his marginal rate.

Finally, Mark could still achieve his after-tax income goal if he invests as little as $260,038 in the TTR pension and draws the maximum income of $26,038.

However, by investing his entire super balance of $400,000 in the TTR pension, he will have the flexibility to increase his income payments, should he need to, up to the maximum of 10% of the account balance per annum.

In year one Before strategy After strategy
Pre-tax salary $80,000 $48,000
TTR pension income Nil $26,038
Total pre-tax income $80,000 $74,038
Less tax payable4 ($18,617) ($12,655)
After-tax income $61,383 $61,383
³Mark’s super benefit consists entirely of the taxable component.

The tax payable takes into account the 15% pension tax offset available on taxable pension payments from preservation age to age 59 and the Low and Middle Income Tax Offset as at 1 July 2020.

Source:  MLC Technical – you can download a print ready concept card here.


Your Westlawn Financial Adviser can help you assess all the issues that need to be considered and determine whether a TTR pension suits your needs and circumstances.

Contact us today:


General Advice Disclaimer
All of the material published on this website is for information purposes only and does not constitute advice. This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, we recommend you consider, with or without the assistance of a Financial Adviser, whether the information is appropriate in light of your particular needs and circumstances.
Dougherty Financial Services Pty Ltd ABN 70 717 487 005 (Trading as Westlwan Wealth Advice) Corporate Authorised Representative 328595 of Libertas Financial Planning Pty Ltd ABN 27 160 419 134 AFSL No. 429718. Please note that Libertas Financial Planning Pty Ltd is not responsible for the advice and services provided by Westlawn Finance Limited, Westlawn Insurance Brokers Pty Ltd, Westlawn Life Insurance Pty Ltd or Westlawn Business Services Pty Ltd.

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