Can you use your pension to retire debt free?

Perhaps you’re considering options for how to reduce your debt before retiring. Well, one option may be to use your pension account, but there are some important things you should consider first.


It’s no secret that Australia, like many countries, has an ageing population. According to the Australian Bureau of Statistics, 16.3% of us are over the age of 65i, but that number is expected to grow to 22% by 2057ii.

The Association of Superannuation Funds of Australia’s (ASFA) latest report states that for people who own their home outright and are relatively healthy, single retirees require super savings of at least $545,000iii to afford a ‘comfortable’ lifestyle in retirement, while couples require $640,000, although this figure may vary depending on a number of factors, including your desired retirement age. Use a retirement calculator to get an estimate of the balance you may need.

While many Australians will carry some debt into retirement – whether on credit cards or mortgages – the idea of retiring debt free is compelling for plenty of reasons, from improved wellbeing due to reduced financial stress, to enhanced financial security.

Various strategies are available to help you work towards reducing your debt while you still have a regular income stream, including downsizing, setting up budgets and gaining a better understanding of how your savings are working for you – do you know where your super is invested, and how it is performing?

Another option is to consider paying off your outstanding debts using your accessible super, through transition to retirement (TTR) or an account-based pension. While both these strategies may offer a way to access immediate funds to pay off debts, doing so could leave your super balance reduced in retirement and could complicate your tax situation now.

So, should you use your pension to retire debt free? Here’s what to consider for either strategy (or both in combination).

Transition to retirement (TTR) pension

This type of pension allows you to access some of your superannuation while you’re still working and is available to anyone who has reached their preservation age: between 55 and 60 years old, depending on your birth yeariv.

Once you reach 60, any transition to retirement pension (TTR) income is completely tax-free. If you are aged 55-59, your TTR income is taxed at your personal income tax rate, less a 15% tax offsetv. A minimum of 2% and maximum of 10% of your account balance can be paid annually prior to retirementvi, with that minimum amount expected to return to 4% on 1 July 2022.


Advantages of TTR

  • An accessible strategy to top up your income if you want to reduce your work hours and ease into retirement.
  • One way to pay off your mortgage or other debts before you enter retirement.
  • As long as you meet eligibility requirements, you’ll continue to receive super contributions from your employer prior to retirement, partially replenishing any money you withdraw.
  • A TTR pension can be used with salary sacrificing, where salary sacrificed contributions are taxed at a low 15%7, rather than simply being taxed at your normal tax rate and the remainder then spent.
  • Other potential tax benefits. Talk to your accountant about these.

Considerations for TTR

  • Setting up a TTR may impact some of your, or your partner’s, government income support or other benefits.
  • If you have life insurance through your super, it may be impacted by your TTR.
  • Earnings on the investment assets backing your TTR pension are taxed at up to 15%, the same as your super.
  • Spending a proportion of your super may mean you enter retirement with insufficient funds to enjoy the lifestyle you would like.
  • Additional set-up, taxation and accounting procedures.
  • Lump-sum payments are not usually available during the TTR phase, which may be an issue if you want to pay off a large debt in one go.

Account-based pension

Also known as allocated pensions, account-based pensions come into effect when you meet a superannuation condition of release, such as fully retiring or reaching age 65viii. TTR pensions automatically convert to an account-based pension when you reach age 65 or when you advise your fund of your earlier retirement, allowing you to draw a regular income (or lump sum(s)) from your super savings.


Advantages of account-based pensions

  • You can receive a regular income stream, with no limit on the amount you can withdraw each year, and flexible payment options.
  • Income payments are tax free once you reach age 60 and are taxed at your marginal tax rate less a 15% offset when between your preservation age and age 60.
  • You can also withdraw lump sums, which may be useful when paying off debtsix.
  • Tax-free investment earnings

Considerations for account-based pensions

  • Your account-based pension is not an infinite stream of cash – it’s made up of the money you’ve saved in super, and it won’t necessarily provide an endless income.
  • There are limits to how much can be transferred to a retirement phase account based pension, whether from a TTR pension or from your super. Exceeding the limit can mean extra tax applies.
  • While there’s no maximum limit to withdrawals, there is a minimum you must withdraw each year, calculated based on your age. For the 2021-2022 financial year, this figure is between 2% and 10%, with the government revising amounts due to COVID-19.
  • Your account-based pension is considered part of your income and assets, and it may impact your ability to access government benefits, such as the Age Pension.

While it’s possible to enter retirement debt free, you need to consider the different strategies that will enable you to do so, and make sure you have enough super to live comfortably when you leave the workforce.

Talk to us about your options today.


©AWM Services Pty Ltd. First published Sep 2021

i Australian Bureau of Statistics (2020): Twenty years of population change

ii Australian Institute of Health and Welfare (2018): Older Australia at a glance

iii The Association of Superannuation Funds of Australia (2018): ASFA retirement standard

iv Australian Taxation Office (2021): When you can access your super

v, vii Transition to retirement

vi Australian Taxation Office (2021): Minimum annual payments for super income streams

viii Australian Taxation Office (2020): Conditions of release

ix Australian Taxation Office (2021): Super lump sum tax table

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