Pssst. Here’s a way you can reduce your working hours, but not your income. Alternatively, the same strategy could help to boost your super balance, giving you more to retire on later.
Interested? You’d better be quick. There’s talk the Federal Government might remove this benefit soon.
It’s known as a ‘transition to retirement’ strategy and allows anyone who’s reached ‘preservation age’ (between 55 and 60, depending on the year you were born) to draw down on their super via a transition to retirement pension.
It’s a useful approach if you’d like to work part-time but you still need a full-time income to pay your mortgage, or other big expenses. It’s also a way of increasing your current income if you continue to work full-time and draw down on your super.
For many, though, the biggest advantage of the transition to retirement strategy has been to use it as a way to boost their super balance. It’s been a major drawcard of the strategy. To make it work, you could increase your salary sacrifice contributions to your super account then commence a transition to retirement pension through your super and draw pension payments to replace the cash in hand you’re missing from your sacrificed salary. For many people, it can be an effective tax planning strategy that helps boost super balances because:
earnings within your transition to retirement pension are tax-free, unlike the accumulation phase of super where your earnings are taxed at up to 15 per cent (within your fund)
pension payments from your transition to retirement pension may be subject to less tax than the salary you’ve sacrificed (for example pension payments are generally tax-free once you’ve reached age 60)
As a tax and super strategy, transition to retirement may work best if you:
have a larger super balance
have a higher marginal income tax rate
have not reached your concessional contributions cap (the cap on the amount of tax-effective contributions you can make to super before extra tax applies)
are aged 60 or older (when pension payments become tax-free for most people)
But don’t despair if you don’t meet any of those conditions. The transition to retirement strategy can also be useful for those with lower super balances and on lower incomes, it’s just that the benefits may not be as great.
Is there a catch?
While the transition to retirement strategy can be a powerful financial tool for many people to boost their retirement savings, it’s not for everyone.
It’s extremely important to get advice as everyone’s circumstances are different and it may not be the best option for some. In particular, those who want to change to working part-time and use pension payments from a transition to retirement pension to top up their income need to remember that they’ll be reducing their super balance.
Meanwhile, those with very high super balances may not see any tax advantages if they use all of their super to commence a transition to retirement pension because of the level of pension payments they’re required to draw. Pension payments from a transition to retirement pension must be a minimum four per cent of your pension balance and a maximum 10 per cent each year. Commencing a transition to retirement pension can also, in some circumstances, negatively impact the amount of social security benefits you’re entitled to.
With good advice from your financial planner, if you’re eligible and can move quickly to put this strategy in place, you may be in line to reap some benefits before the policy is changed.
Tips and tricks
Our tips and tricks for those considering the transition to retirement (TTR) strategy:
If you’re aged 60 or over, the best strategy is often to convert nearly all of your super balance to a TTR pension. However, if you’re under 60, and if you have only a limited amount of concessional contributions cap remaining, the best strategy may be to only convert part of your super to a TTR pension.
It might be important to leave a small amount in existing accumulation super (for example, to ensure insurance premiums can be paid).
For lower income earners, TTR strategies may work better with some after-tax contributions as well, to qualify for a government co-contribution.
If you have some non-preserved benefits in your super and you are under 60, you may be able to make lump sum withdrawals instead of drawing pension payments, which can make the TTR pension more tax effective and increase the benefit of the strategy.
It’s important to check the strategy each year to make sure you are drawing the right amount of TTR pension payments and making the right amount of super contributions. These can change each year, particularly in the year you reach age 60.
It can also help to consider refreshing the strategy every couple of years. This helps convert the super contributions that have built up in the accumulation phase, across to a TTR pension again.
When considering the best level of concessional contributions to make to super so that you don’t exceed your concessional contributions cap, make sure you allow for any super guarantee your employer is already paying, as well as any personal contributions for which you will claim a tax deduction (if eligible).
You can see the transition to retirement strategy in action using case studies. Here’s an example of someone using the strategy to boost their super while continuing to work full-time. And here’s one where someone chooses to work part-time and use their super to supplement their income.
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The information contained may include general advice but does not take into account the investment objectives, financial situation and needs of any particular individual or trustee of a self-managed super fund. You should assess with the help of legal, financial and taxation advice, whether the information is appropriate in light of your own circumstances before acting on it.
