From TTRs to transfer balance caps, and from income streams to non-concessional contributions, retirement comes with a language all of its own. While the terms may sometimes be unfamiliar, the definitions are easy enough to understand, and helpful for those of us heading towards retirement or accessing superannuation.
Your super fund may be able to help you understand the terminology, says Lisa Palmer, the executive manager of intermediary distribution and growth at Hostplus.
“A really good starting point is going on to your super fund’s website,” she says. “We’ve become much more aware of how difficult the language of retirement can be, and we’ll often have information trying to describe things in a simpler way to help support that understanding.”
With that in mind, Palmer has decoded a few key terms you’ll want to have in your retirement dictionary.
Transition to retirement (TTR)
Retirement isn’t an all-or-nothing scenario, and neither is accessing your super. This is where transition to retirement (or TTR) can be a useful option. “TTR is a solution that enables members to access their super, typically as a source of regular income, while they’re still working,” Palmer says.
If you have reached preservation age you can wind down your working hours while drawing on your super to top up your income and keep the same standard of living. At the same time, you can keep adding to your super by salary sacrificing, which can have tax benefits.
Government age pension and super pension
While both are pensions, these are very different things. The government age pension is an “income support payment from the Australian government that can help eligible Australians aged 67 and over meet their basic living expenses in retirement”, Palmer says.
A super pension, on the other hand, is a regular payment drawn from your super savings, which remain invested after retirement. A retiree can start receiving an income from their super from the age of 60.
Both pensions can work side by side, and super fund pensions can be tailored to suit the individual. “Income payments coming from super have a lot more flexibility for a retiree to support their retirement needs,” Palmer says.
Drawing down and topping up
These retirement terms are two sides of the same coin. Drawing down refers to the amount that comes out of a super fund pension or income stream – and there are prescribed minimum amounts – while topping up means adding to a super balance through personal contributions (more on that later).
Palmer says that while the terminology of retirement and super can be confusing, a simple analogy can help make the concepts clearer. “Think of your super as being a water tank,” she says. “When I’m topping it up, I’m actually filling that tank. When I am ready to start using what I’ve added, I turn the tap on, or draw down. I can also control the speed at which I do that depending on how much I want or need.”
Preservation age
Preservation age is the minimum age at which people can access their superannuation (currently 60) and is distinct from the age of access to the government age pension (67). If you’re unfamiliar with the difference, Palmer says you might not fully understand your retirement options.
“It is not uncommon for people to think they have to wait until they reach pension age before they can retire,” she says. “This is where super may be able to help. If they have saved enough through their working life, they might not have to wait until they’re 67 and may instead have an ability to retire or semi-retire much earlier. For many, reaching preservation age is a real milestone and can provide prospective retirees with flexibility.”
Concessional contributions and non-concessional contributions
If you’re topping up your super with your own money, you’re making a contribution, but there are two distinct categories.
Concessional contributions are pre-tax contributions, currently capped at $30,000 a year. “You can make concessional contributions either through a salary sacrifice arrangement – by arranging for your employer to put amounts into your super before income tax is deducted – or you can do it yourself and then claim a tax deduction,” Palmer says.
Non-concessional contributions are those made after tax and are currently capped at $120,000 a year. “We commonly see this type of contribution being used for those with modest incomes, so they can receive a government co-contribution, or when people are selling assets like a property, term deposits or shares,” Palmer says.
Transfer balance cap
When retirement finally rolls around, super can be switched from the accumulation phase – during which you and your employer top up the tank – to the pension or income phase, allowing you to take income payments from your super balance. When you shift between these phases, it is important to understand that there are lifetime limits.
“The lifetime limit is known as the transfer balance cap and is the total amount that you can move from accumulation into the income phase,” Palmer says. “Turning your super into an account-based retirement pension may be beneficial because not only can it provide you with a regular income, but the earnings are completely tax free.” Currently, the transfer balance cap is $1.9m.
Retirement doesn’t have to be a foreign language
It may seem overwhelming at first, but learning the language of retirement can be a big step towards enjoying a comfortable life after work. Understanding super terminology can help with everything from maximising your super balance for the years ahead to working out how and when you can access your super.
Whether you’re learning the language from your super fund’s website or seeking retirement planning advice from a professional financial adviser, it’s well worth taking some time to understand the finer details of retirement.
The information provided in this article is of a general nature only and does not constitute financial or other advice. It is important to consider personal objectives, financial situations or particular needs when making financial decisions.