Why you need to know about the transition to retirement strategy
If you’re still in the workforce and wanting to plan for your future, the transition to retirement strategy could be worth a look. Here’s how it can help provide a comfortable retirement.
There are a number of pension strategies which allow those with an eye on the retirement horizon and those who are already retired to take advantage of the superannuation structure.
One of these strategies is the transition to retirement strategy, which can be a good way to increase your super balance as you near retirement without affecting your after-tax income. The strategy would allow a person over 60 to access a tax-free income stream from super, while at the same time continuing to make further contributions.
With retirement changing, more people are looking to take a gradual step into retirement by reducing their work hours. The benefit of this and utilising the transition to retirement strategy is that you can effectively draw on your super to provide an extra income stream from your take-home pay while still being able to contribute to it.
A properly executed transition to retirement strategy could add thousands of dollars to a standard retirement income, while at the same time ensuring your super balance continues to grow.
Setting up a transition to retirement pension
A transition to retirement pension can provide a tax-effective income to replace your salary if you plan on scaling back your work hours.
Introduced by the Howard government, a transition to retirement pension was designed to allow individuals to reduce their working hours and transition into retirement, while at the same time having access to some of their super to compensate for the reduced employment income. However, there is no rule that states you must reduce your income to use a transition to retirement pension and as such, a number of strategies have been developed.
If you’d like to keep working full-time, you can still utilise this pension by sacrificing some of your pre-tax salary into your super fund and use the income from the transition to retirement pension to compensate for your reduced salary. This could help you build a bigger retirement nest egg without reducing your current income.
What are the benefits?
Chris Cornish, principal financial adviser with Perth-based Avant Financial Services, says there are two main benefits to a transition to retirement pension.
“The first is that your superannuation moves from accumulation phase, where earnings are taxed up to 15 per cent, to pension phase where there is a zero per cent tax rate. Obviously the bigger your superannuation balance the bigger the benefit,” he explains.
“The second benefit is that a TTR allows salary sacrifice to be increased and the ‘lost’ income can be partly or fully replaced by the pension payments. The salary sacrifice will be taxed at 15 per cent as opposed to their marginal tax rate and the higher the income, the bigger the benefit.”
When can I access this?
You can access a transition to retirement pension when you reach preservation age, which is currently 55. Between ages 55 and 60 pension payments are taxed differently and the main benefits are experienced when you’re over 60.
What else do I need to know?
Mr Cornish says there are a few important considerations to keep in mind when looking to set up a transition to retirement pension.
“A minimum level of income must be made from the transition to retirement pension, and for those under 65 this is four per cent. The maximum payment is 10 per cent and no lump sum withdrawals can be made,” he says. This means that if you’re a high income earner and don’t require the pension payments, you still need to take them. However, you can simply contribute them back into super as a non-concessional contribution.
Another thing to keep in mind is that you don’t want to salary sacrifice if you’re earning below $18,201. Below this, the marginal tax rate is zero per cent so you don’t want to needlessly incur a 15 per cent tax from salary sacrificing into super. Also don’t exceed the concessional contributions caps!
When it comes to salary sacrifice, there are a few other things to be aware of, such as employers don’t need to offer employees the ability to salary sacrifice, employers can pay their nine per cent super guarantee contributions on your lower income, employers can use your lower income while calculating holiday pay, sick leave and long service leave, and employers can charge an administration fee.
Figuring all of this stuff out can get fairly complicated, so if in doubt or if you’d like clarification on anything, or advice, seek qualified financial advice services. When it comes to setting yourself up before and during retirement, you want to be in the best position. A financial adviser can help you do that.