Is retirement on your radar?

A Transition to Retirement (TtR) pension allows people between age 55 and 64 to access part of their super through a pension while still working. This strategy can be used while working full time or part time and, when combined with salary sacrifice, it can boost your super while providing significant tax advantages.

With a TtR pension you can supplement your part-time income, making it possible to maintain your current lifestyle while working fewer hours. You can withdraw up to 10 per cent of your account balance each year. Plus, as you are still working, you can keep contributing to your super – through your 9 per cent employer super guarantee and/or salary sacrifice.

Income that you receive from a TtR pension is favourably taxed compared to your earned income. If you’re aged 60 and over, the pension income is tax-free and if you’re between 55 and 59, it is taxed at your marginal tax rate and receives a 15 per cent tax offset. This means the maximum tax rate you may be charged is 30 per cent (excluding the Medicare levy).

A TtR pension and salary sacrifice strategy will generally be most effective if you are in a high marginal tax bracket and are salary sacrificing more than you are drawing down from a pension.

If you are salary sacrificing in combination with a TtR pension, it’s important to contribute within the allowed limits to avoid paying excess tax. Until 30 June 2012, the concessional super contribution caps (which include salary sacrifice and super guarantee) for anyone aged 50 or over are $50,000pa. However, it has been proposed, after this date, the amount is reduced to $25,000pa. Any excess over the cap will effectively be taxed at the top marginal tax rate.

An added benefit is that if you decide that part-time work is not for you and choose to go back to work full time, there is flexibility to stop this type of pension and revert to simply accumulating your super.

Case study

David, age 60, cannot afford to retire but would like to reduce his workload – from 40 hours a week down to 27 hours a week – for a combination of family and health reasons. His annual salary will reduce from $60,000 to $40,000. David has $200,000 (all taxable component) accumulated in his super account.

As David would like to maintain his present level of net income (i.e. $60,000pa), he could use a TtR pension to meet his income shortfall.

Let’s compare the impact that David’s partial retirement will have on his income position.

	Before	After
Annual salary	$60,000	$40,000
Gross assessable income	$60,000	$40,000
Income tax1	($12,150)	($5,050)
TtR allocated pension income	-	$12,900
Take home pay	$47,850	$47,850
Net hourly rate of pay	$23	$34

¹ Includes the Medicare levy, but excludes the flood levy which only applies for the 2011-12 financial year.

As you can see, the tax-effectiveness of a TtR strategy has enabled David to maintain his net income, by meeting his income shortfall of $20,000 with only $12,900 from his super, after reducing his hours of employment.

Retirement income strategies can be complex. For instance, if you use part of your super to access a TtR pension, this may impact your future lifestyle. So speak to us about what you can do to increase future retirement income, as well as to find out more about how you could ease into retirement with a TtR pension.

 

What you need to know

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. Some of the information in this article is based on our interpretation of the law. It is a summary of the subject matter covered and is not intended to be comprehensive tax or financial advice. No reader should act on the basis of this article without obtaining specific professional advice. Further details are available from us, or AMP Financial Planning Pty Limited on telephone 1300 157 173.