Transition to Retirement
Planning for retirement is a critical function for anyone and the closer you get to retirement, the more important it is to have appropriate plans in place.
We have asked for some information to be provided on this topic by Kate Zerbst of Affordable Financial Advice and this is shown below. Please note that this is intended for general information and should not be relied on as being applicable to your own circumstances without checking with Kate or your financial advisor.
Whether retirement is 10 years off or just around the corner, if you are over 55 and have reached your preservation age, you can access your super as an income stream and potentially reduce your tax bill – this is called a transition to retirement pension.
How might you be able to benefit from accessing your super earlier?
• Cut back your working hours whilst maintaining the same income; or
• Continue to work full time but increase the rate at which your super is growing (and potentially reduce your tax bill at the same time); or
• Continue working, draw an income stream and use it to reduce debt or build your non-super assets.
Let’s take a look at these more closely:
1. Cut your hours, not your income
If you have ever thought about retiring but don’t feel you are ready financially or emotionally just yet, then working part-time could be an option. Many of us dream of cutting back our hours but for most of us it isn’t possible as less hours means less pay. Starting a transition to retirement pension at the same time that you reduce your hours could mean that, depending on your circumstances, you end up with the same net income as when you were working full-time, so you don’t have to compromise your standard of living.
2. Boost your super, faster, without sacrificing lifestyle
For many people, maximizing their super balance is the most important aspect of retirement planning. One of the most tax effective ways to contribute to super, depending on your circumstances, is to salary sacrifice.
Salary sacrificing into super simply involves giving up some of your pre-tax salary in exchange for additional contributions into your superannuation. The benefit is that the portion of your income that you salary sacrifice is not taxed at your marginal tax rate and is instead taxed at the concessional rate of 15%. This could represent a significant tax saving.
Whilst salary sacrificing can be attractive, increasing your salary sacrificed contributions obviously means cutting your take home pay. For many people, their current commitments make this option unrealistic. However, a transition to retirement pension could allow you to top up your pay with an income stream from your existing superannuation – meaning you could increase the amount you salary sacrifice into superannuation whilst maintaining your overall income levels. In simple terms, you could say you are increasing the growth of your super by spending it.
The self-employed can also take advantage of this opportunity; instead of salary sacrificing your pay into super, you can make tax deductible contributions to super and start a transition to retirement pension to achieve the same result. It seems odd that you can grow your super by putting money in with one hand and taking it back out with the other. However this is possible because of the tax treatment of the income stream from your super.
Put simply, if the amount you are drawing down from your super to top up your reduced pay is less than the extra money you are now putting into your super through salary sacrifice then your overall super should grow. Once you reach 60, all super benefits you receive will be tax free, further lowering the amount you need to take out and further increasing the attractiveness of this approach.
3. More flexibility when you draw an income through super
Drawing an income from your super whilst working full time could open up a number of other opportunities such as:
• Improving your current lifestyle
• Reducing debt
• Growing other assets
Much thought should be given as to the consequences of drawing down your super ahead of your eventual retirement, but depending on your circumstances the emotional and/or financial benefits of this approach could be significant.
A transition to retirement pension has been incorporated into a number of Affordable Financial Advice client strategies as the benefits are so worthwhile. However it is a complex area and you should work out the merits of this type of pension with a financial adviser who can take your unique financial situation into account.
Please give Kate at Affordable Financial Advice a call on 0412 324 924 if you want to find out more or call FinancialPlus in the first instance.