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Retirement Planning

Superannuation income streams 

The main type of superannuation income stream is an account-based pension. Account-based pensions provide a flexible and tax-effective method of generating income in retirement. Earnings and capital gains within the account-based pension are tax free. pension payments may be taxable when you receive them (unless the recipient is at least 60 years of age) however, subject to individual circumstances, if you are under age 60, you may be eligible to claim a tax-free amount, as well as a 15% tax rebate on the taxable portion of the payment.

Transition To Retirement Pensions

 Once you contribute money to superannuation you have to meet strict conditions to access your retirement savings. Generally, you have to wait until you are fully retired or reach age 65. However, there is another option – you can continue to work possibly in a reduced capacity (less hours), and access your superannuation in the form of a pension. This is known as a Transition to Retirement pension (TTR).

The transition to retirement scheme offers incentives for older workers to remain in the workforce for longer than originally planned. It can also prolong superannuation savings. If you find yourself weighting up whether it’s time to retire from the workforce altogether, this could be the perfect way to have a trial run.

If you are aged 55 or older, you can start a TTR pension to supplement your salary while you continue to work. This could, for example allow you to reduce your hours of work or take on a lower paid job with less responsibility. Of course, you can continue to work full time if you prefer.

The main advantage of a TTR pension is the potential Tax saving it offers. Quite simply, the income received is taxed concessionally for those under the age of 60, or could be tax-free from the age of 60.

You can combine the TTR pension with salary sacrifice contributions in to superannuation which may boost your tax savings even further. Instead of paying your marginal rate of tax (can be up to 46.5%) on your salary, you can salary sacrifice a portion and only pay 15% tax on the contribution to superannuation.  The income from the pension can replace your reduced salary. This means you may be able to receive the same, if not more income than before due to the savings.

The combination of a TTR pension and salary sacrifice arrangement is best suited if you:

  • Are age 55 or more,
  • Are working full-time, and
  • Have some superannuation savings already.

A couple of points you need to be aware of regarding TTR pension:

  • You can select a pension between a set minimum and maximum limit each year,
  • Pension payments are paid tax-free if you are age 60 or over or concessional taxed if aged between 55 and 60 (a portion of your pension payments may be tax-free and you may be eligible for a tax offset),
  • You cannot make lump sum withdrawals from the pension (unless you fully retire or reach age 65),
  • Tax on investment earnings is capped at 15%,
  • You can stop the pension at any time and your money will be ‘rolled’ backed to superannuation,
  • Centrelink will include the account balance of the TTR pension and a portion of the pension payments in assessing your eligibility for age pension (if applicable).

Let’s look at transition to retirement in action.

Example 1 – transition to retirement

Mel, a widow (age 60) wants to reduce her working hours and decides to work three days a week instead of five days. She plans to continue working in to her 60s. She is concerned about how she will manage on a reduce income.

Mel already has $250,000 in superannuation and is currently on a full time salary of $60,000 (net income $48,000) plus 9% employer super contributions ($5,400). Her salary has reduced to $30,000 ($27,950 net) once she goes part-time. Mel believes she now only requires net income of $38,000 as her mortgage is paid off and her kids have left home.

Mel decides to commence a TTR pension paying $10,000 per annum to supplement her income, giving her total net income of approximately $38,000.

By using a TTR pension Mel can reduce her hours of work and supplement her income with the pension.

Example 2 – transition to retirement and salary sacrifice

James (age 57) is working full time and is on a salary of $80,000. James wants to maintain his lifestyle, save on tax and build his superannuation before his planned retirement at age 65.

James has $300,000 in superannuation.

James decides to commence a TTR pension with $250,000 and salary sacrifices some of his income. If James salary sacrifices $15,000 and draws $12,500 per annum from his TTR pension, he will have around the same net income. He will save $50,764 in tax and have $48,224 more in superannuation by the time he is age 67.

As salary sacrifice uses pre-tax dollars, James can actually contribute more to superannuation than he withdraws, without affecting his cash flow or lifestyle, but reducing his tax payable.

Transition to retirement

“Transition to retirement” is a government initiative aimed at encouraging people to participate in the workforce longer by offering incentives to older workers.

Under this scheme it is possible for you to reach your superannuation preservation age and access benefits in the form of a non-commutable income stream before you permanently retire.

For further information on transition to retirement income stream, see “Understanding account-based pensions” or speak with your financial adviser.

Taking your superannuation as a lump sum

The tax-free component of a superannuation benefit is generally made up of your non-concessional contributions. The taxable component of a superannuation benefit is the total value of the superannuation benefit less the tax-free component. The taxable component is generally made up of your concessional contributions as well as earnings.

When you withdraw your funds, the following taxation implications will apply for 2016/17

Component

Below preservation age

Preservation age too age 59

Age 60 and over

Tax free component

Tax free

Tax free

Tax free

Taxable component

20% Plus Medicare

First $205,000 Tax free

>$205,000 17% including Medicare

Tax free

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About RSA

At Retirement Services Australia, we give our customers all the tools and guidance they need to create an effective retirement planning solution, and we help you every step of the way. We employ retirement planning specialists who offer to help create financial strategies that will suit you for life. We work with you to solve the matters we have touched on in this article. Our traditional clients are delegators who want to know what, why and when things need to happen but prefer to engage experts to do this work on their behalf.