The Nature of Retirement is Changing and So Are the Rules
If you want to reduce your working hours or even pay less tax without sacrificing your income, a transition to retirement pension could be the answer.
Longer life expectancies mean many Australians are spending more time in retirement than ever before1 This is increasing the burden on our social security system and emphasising the importance of accumulating superannuation. As a consequence, the Government is encouraging us to remain in the workforce beyond the traditional retirement age.
Did you know that you can access your superannuation while you are still working?
Using a transition to retirement pension you can generally access between 4-10 per cent of your super balance, as long as you’ve reached your preservation age (between 55 and 60 depending on the year you were born) and you are still working, up to age 65.
There are a few ways you can benefit:
- continue to work full-time but reduce your tax by taking a pension and salary sacrificing some of your income into super,
- moving from full-time work to part‑time work and replacing lost salary with income from the transition to retirement pension,
- as a business owner/operator, you could use a pension to supplement your income needs in quiet times.
A transition to retirement pension may also help reduce your overall tax bill while boosting your total super balance before you retire.
This is how it works. You contribute part of your salary to super (where it is generally taxed at just 15 per cent2 rather than at your marginal tax rate). You then move your super money into a tax-free ‘transition to retirement’ pension and use the pension income to supplement your reduced salary. The tax-effectiveness of the pension will help lower your overall personal tax liability.
Your preservation age
Under current superannuation law you must reach your preservation age before you can access your super. Your preservation age depends on the date you were born:
|Date of birth||Preservation age|
|Before July 1960||55|
|1 July 1960 – 30 June 1961||56|
|1 July 1961 – 30 June 1962||57|
|1 July 1962 – 30 June 1963||58|
|1 July 1963 – 30 June 1964||59|
|After 30 June 1964||60|
Things to consider
Your transition to retirement pension income stream is non-commutable apart from any unrestricted non-preserved components within it.
Non-commutable means you can’t convert the income stream into lump sum cash until you satisfy a full condition of release from super, such as retirement or turning 65.
Your transition to retirement pension will work in a similar way as a standard superannuation pension, subject to the non-commutable requirements and restriction on the amount of pension you can withdraw. You can withdraw between 4 per cent and 10 per cent of the pension account balance each year and have the flexibility to vary the payment at any time during the year, within these set ranges.
You should also keep in mind the possibility of your career not going exactly to plan – a redundancy or a forced or unplanned early retirement once you’re over 55 could interrupt this strategy and mean that you will have to review your circumstances with your financial adviser.
Another important point to consider is, if you are under 50 from 1 July 2014, you can contribute $30,000 a year to your super (up from $25,000). If you are 50 or over during 2014/15, you will be able to contribute up to $35,000 a year (from $25,000).
Self-managed super funds
If you plan to use this strategy through a self-managed super fund, you should ensure that the trust deed is drafted broadly enough to allow you to commence any pension allowed under super law.
Once you have reached age 60, your pension payments and any lump sum withdrawals will generally be tax-free. A financial adviser can help you to structure your pension to legally minimise your tax obligations.
Police Bank for many years have chosen Bridges3 as our preferred Financial Planners. A Bridges Financial Planner can review your investments and entitlements and decide what strategy is appropriate for your circumstances.
For more information or to arrange a complimentary, obligation free initial consultation near you, please call 131 728 or visit our Financial Planning page.
1. Information sourced from the Australian Institute of Heath and Welfare – mortality data.
2. The contributions tax rate is up to 30 per cent for individuals with income over $300,000 pa. This may lower the amount of concessional contributions that can be split.
3. Bridges Financial Services Pty Ltd. ASX Participant. AFSL No 240837. Part of Australian Wealth Management. In referring members to Bridges, Police Bank does not accept liability or responsibility for any act or omission or advice provided by Bridges or its Authorised Representative. Bridges pay referral fees ranging from 0% to 30% of the entry and /or any ongoing fee (plus incentive payments from the amount you pay Bridges).