Financial Planning
Using your super to ease your transition to retirement
Overview
People who are 55 and over may desire a smooth transition to retirement by reducing their working hours or changing from a full time to a part time employment arrangement. However, typically there will be a commensurate reduction in employment income, which may have lifestyle implications.
Prior to 1 July 2005, such people - assuming they had no significant investments they could draw on or wished to draw on - generally could not do much about this drop in income, other than fully retire to access their superannuation if they wished to maintain their income level. This is because superannuation benefits are generally not accessible until full retirement from the workforce.
From 1 July 2005, changes to the superannuation regulations mean that people who are 55 and over can access their superannuation in order to supplement their reduced employment income as they change their work/leisure balance in anticipation of retirement.
This reform will encourage people who are approaching retirement to stay in the workforce.
How does it work?
The regulations allow people who are aged 55 or over to commence a pension with part or all of their superannuation benefit.
Normally superannuation pensions are “commutable” in part or full, meaning the investor can make lump sum cash withdrawals at any time. However because pensions commenced under the new regulations are intended to supplement reduced employment income, cash commutations are not permitted until the investor’s retirement takes place in accordance with the superannuation regulations or until age 65 is attained.
These types of pensions are often called “transition to retirement pensions”.
Case Study
Matthew is aged 58 and wants to cut back his working hours. While his pre-tax salary will reduce from $60,000 p.a. to $40,000 p.a., Matthew doesn’t want to compromise his lifestyle.
By commencing a transition to retirement pension and drawing a pension income of $15,820 p.a., Matthew will meet his after-tax income goal of approximately $46,000 (see table on the following page).
The reason that the $20,000 drop in employment income is replaced by only $15,820 in pension income (to get the same level of income net of tax) is due to the tax-effectiveness of the pension income. Drawing the pension entitles Matthew to two tax offsets:
- A 15% tax offset on the pension income and
- the mature age worker tax offset
| |
Before |
After |
| Salary |
$60,000 |
$40,000 |
| Non commutable allocated pension income |
Nil |
$15,820 |
| Total pre-tax income |
$60,000 |
$55,820 |
| Less tax payable |
($13,500) |
($9,310) |
| Net income |
$46,500 |
$46,510 |
Annual payments from “transition to retirement pensions” must fall within statutory “minimum” and “maximum” payment levels relative to both the recipient’s account balance and age. Non commutable income streams allow a minimum payment of 4% and a maximum payment of 10% of the account balance.
For example, to draw a pension of $15,820 p.a., Matthew must have around $160,000 in his pension account (assuming he chooses a payment around the maximum level). Alternatively, he could commence the same pension with a balance as large as $400,000 (assuming he chooses a payment around the minimum payment level).
If Matthew selected the minimum payment level, he could increase the pension income if he should decide to cut his work hours further.
On the other hand, if Mathew wanted to return to full time hours, he could roll the pension back to his superannuation fund.
The importance of advice
If you think a transition to retirement pension may suit your circumstances, it is important to seek financial advice as there may be taxation, social security and estate planning implications to consider.
For further clarification on any of the above changes or for assistance with how they may impact your personal situation, please give us a call or send an enquiry and we will get back to you.
Garvan Financial Planning
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