If you’re under 65, but older than your preservation age, and still working more than 10 hours a week, you should consider a transition to retirement (TTR) pension.

The attraction for most people with these products is the ability to save tax at several different levels.

But if you set these products up the wrong way you can actually destroy much of your retirement wealth by taking money out of your super before retirement, spending it and not saving any other money.

The best way to use these products is to contribute more into super (reducing your take-home salary) and then supplement the foregone salary with income from the TTR pension.

If you don’t have time to understand all the intricacies about these products here are seven basic steps for their effective use:

1. After 1 July 2015 you have to be at least 56 to run a TTR pension and you may need to be older depending on your preservation age.
2. Know how much tax you pay now – ask your accountant to work this out. Don’t forget to also factor in employer super contributions (taxed at 15%), tax breaks such as investment deductions on property or shares, and government benefits such as the Family Tax Benefit and Child Care Rebates. Also don’t forget to include the tax you pay on your super investments.
3. Work out what additional tax-effective contributions you can make to super. This will either be via additional employer contributions or if you’re not employed, then by personal contributions that you can claim as a tax deduction.
   These are called concessional contributions. The current concessional caps – $35,000 this financial year if you were aged at least 49 on 30 June 2014 or $30,000 for everyone else – severely restrict our ability to grow our retirement income tax-effectively. Note: included in this cap will be any compulsory employer superannuation contributions, which your employer may reduce because they’re paying you less take-home salary.
4. Reduce your income by the additional super contributions made in Step 2 and work out how much net tax you will pay now on your revised salary arrangements. Don’t forget that these new additional super contributions are taxed at 15%.
5. If you’re over 60 then pretend that you’re taking a pension from your super fund. (The pension income paid to you must be between 4% and 10% of the pension’s account balance.) This pension is tax-free and the earnings on the assets backing this pension are also tax free. So the amount of tax you worked out in step 4 is all the tax you will pay under these proposed new arrangements. Compare this to the tax you worked out in step 1.
6. If you’re aged between 56 and 60 then the pension income is subject to income tax less a 15% Tax Offset.
   So if you’re in this age bracket, re-work the tax numbers you determined in step 4 by including the pension income in your tax calculations but don’t forget about this tax offset. Also don’t forget that the earnings backing the pension are tax-free. Compare the number you worked out here with the number you worked out at step 1.
7. Finally the super laws don’t allow you to commute a TTR pension (ie withdraw more than the 10% of the account balance) unless you permanently retire.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.