Will you be able to enjoy your retirement?

According to the latest AMP Retirement Adequacy Index, over 46% of 55-59 year old workers are facing an inadequate lifestyle in retirement.

While the much-welcomed Labor government’s announcement to increase compulsory superannuation from 9% to 12% by 2019 could have a significant impact on the retirement adequacy for average Australians – lifting savings by $46,000 or almost 3% – it may be a case of too little too late for people reaching the end of their working lives.

However all is not lost, and with a little help, there is a great way for people over the age of 55 to boost their retirement savings with a building for retirement strategy.

What is building for retirement?

A building for retirement strategy involves re-arranging the way you receive your take home pay – whether that be your salary or wage income, or your earnings as a self-employed person.

By replacing some or all of your regular take home pay with a regular pension from money held in your super fund, you can make the most of a number of tax concessions – resulting in a boost to retirement savings and a greater chance of a more comfortable lifestyle in retirement. 

How does it work?

While you might not be able to take your money as a lump sum just yet, once you reach your super preservation age (currently age 55), you can access your super in the form of a regular pension.

Some of this money may be tax-free, and any taxable amounts will benefit from a 15% tax rebate. Once you reach age 60, it gets even better, as all of the income you receive from your super pension will be completely tax-free!

Also, you won’t pay any tax on the investment earnings on the money in this pension account.

As a result of this regular pension, you will have a higher level of income available. Of course you could use this as an opportunity to reduce your working hours, help meet your living expenses, or even reduce your mortgage.

Alternatively, you could use it as an opportunity to improve your retirement adequacy by using this extra income to make tax-effective super contributions. There are government limits on how you can contribute to superannuation. Any money you contribute to super is generally taxed at 15%, meaning you could save up to 31.5% in income tax (including Medicare levy).

Example – boosting retirement adequacy

Andrew is 55 and self-employed. He currently earns around $95,000 a year and has a super balance of $200,000.

Andrew wants to retire at age 65 and would like to boost his super savings. Unfortunately, because of his current living expenses, he doesn’t have any extra money available to invest.

After speaking to his financial planner, Andrew decides to start a building for retirement strategy where he will set up a super pension account in order to receive a regular pension from his super savings, and use the extra income this creates to make tax-effective (pre-tax) super contributions.

While these tax-effective super contributions will generally attract a 15% contributions tax, the overall benefits of this strategy can be seen after only the first year.

Results at the end of the first year:
Additional super contributions	$1,146
Net annual increase in super balance	$3,244

Based on the maximum super income payment that he’s allowed to receive (i.e. $20,000 pa), Andrew has already started to boost the adequacy of his retirement lifestyle without impacting his current take home pay!

Once Andrew reaches age 60, the pension income he draws from his super fund will be completely tax-free, resulting in an even greater annual benefit:

Results for the year in which Andrew turns 60
Additional super contributions	$4,721
Net annual increase in super balance	$7,631

But this is only half of the story!

By starting a building for retirement strategy, any investment earnings on the $200,000 that Andrew has put into his pension account, will not attract any tax.

So, after 10 years, Andrew’s retirement position at age 65 has been improved by close to $62,000 (or around 14%) as a result of the building for retirement strategy – all without impacting his take home pay!

Want to know more?

To see whether you’re on track for an adequate lifestyle in retirement – and to learn how a building for retirement strategy could help improve your retirement income – please contact us today.

What you need to know
Information current as at September 2010.  This article contains general information only. It does not take into account your objectives, financial situation or needs. Please consider the appropriateness of the information in light of your personal circumstances.  If you decide to purchase or vary a financial product, your financial planner, our practice, AMP Financial Planning and other companies within the AMP Group will receive fees and other benefits, which will be a percentage of the premium you pay and/or the advice fee you agree with us.  Further details are available from your planner or AMP Financial Planning Pty Limited, telephone 1300 157 173.