Deciding when to retire is a big decision and even more difficult if you are concerned about your retirement income.
The average age of Australia’s 4.2 million retirees is 56.9 years but many people leave it a little later to finish work with most intending to retire at just over 65 years.i
If you’re not quite ready to retire, a ‘transition to retirement’ (TTR) strategy might work for you. It allows you to ease into retirement by:
supplementing your income if you reduce your work hours, or
boosting your super and save on tax while you keep working full time
The strategy allows you to access your super without having to fully retire and it is available to anyone 60 years or over who is still working.
Working less for similar income
The strategy involves moving part of your super balance into a special super fund account that provides an income stream. From this account you can withdraw funds of up to 10 per cent of your balance each year.
As you will still be earning an income and making concessional (before-tax) contributions to your super, this approach allows you to maintain income during the transition to full retirement while still increasing your super balance, as long as the contributions continue.
Note that, generally speaking, you can’t take your super benefits as a lump sum cash payment while you’re still working, you must take super benefits as regular payments. Although, there are some exceptions for special circumstances.
Take the example of Alisha.ii Alisha has just turned 60 and currently earns $50,000 a year before tax. She decides to ease into retirement by reducing her work to three days a week.
This means her income will drop to $30,000. Alisha transfers $155,000 of her super to a transition to retirement pension and withdraws $9,000 each year, tax-free. This replaces some of her lost pay.
Income received from your super fund under a TTR strategy is tax-free but note that it may affect any government benefits received by your or your partner.
Also, check on any life insurance cover you have under with your super fund in case a TTR strategy reduces or stops it.
Give your super a boost
For those planning to continue working full-time beyond age 60, a TTR strategy can be used to increase your income or to give your super a boost.
To make it work, you could consider increasing salary sacrifice contributions into your super then using a TTR income stream out of your super fund to replace the cash you’re missing from salary sacrificing.
In another example, Kyle is 60 and earns $100,000 a year. He intends to keep working full-time for at least another five years. Kyle transfers $200,000 from his super to an account-based pension so he can start a TTR strategy then salary sacrifices into his super.
This will reduce his income tax, but also his take-home pay. So, he tops up his income by withdrawing up to 10 per cent of his TTR pension balance each year.iii
A TTR strategy tends to work better for those with a larger super balance, a higher marginal income tax rate and those who have not reached the cap on concessional contributions.
Nonetheless, it can still be useful for those with lower super balances and on lower incomes, but the benefits may not be as great.
Some things to think about
TTR won’t suit everyone. For example, be aware that you cannot withdraw more than 10 per cent of your super balance each year.
Also, if you start withdrawing your super early, you will have less money when you retire.
The rules for a TTR strategy can be complex, particularly if your employment situation changes or you have other complicated financial arrangements and investments. So, it’s important to seek professional advice to make sure it works for you and that you are making the most of its benefits.
If you would like to discuss your retirement income options, give us a call.
Contact Carrick Aland’s Wealth Planning team on 1300 466 998 or visit carrickaland.com.au/wealth-planning/.
WEBSITE DISCLAIMER
This website is published by Carrick Aland Wealth Planning Pty Ltd. Carrick Aland Wealth Planning Pty Ltd (CARN 263248) are authorised representatives of Millennium3 Financial Services Pty Ltd (ABN 61 094 529 987, AFSL 244252). The information contained in this website and any of the resources available through it including eBooks, fact sheets, and seminars (‘Content’) has been prepared for general information purposes only and is not (and cannot be construed or relied upon as) personal advice. No investment objectives, financial circumstances, or needs of any individual have been taken into consideration in the preparation of the Content. Financial products entail risk of loss, may rise and fall, and are impacted by a range of market and economic factors, and you should always obtain professional advice to ensure trading or investing in such products is suitable for your circumstances.
Under no circumstances will any of Carrick Aland Wealth Planning Pty Ltd, Millennium3 Financial Services Pty Ltd, its officers, representatives, associates, or agents be liable for any loss or damage, whether direct, incidental, or consequential, caused by reliance on or use of the Content. This Content is restricted to Australian residents and is for the intended recipient only. From time to time, Carrick Aland Wealth Planning Pty Ltd representatives or associates may hold interests in or transact in companies or products mentioned herein and may receive fees or other benefits, in connection with the making of any recommendation or facilitating a transaction in such companies or products.
