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1 July 2020 (updated annually)
If you want to reduce your working hours or pay less tax without sacrificing your cash flow, a transition to retirement pension could be the answer.
Longer life expectancies mean many Australians are spending more time in retirement than ever before1 – increasing the burden on our social security system and emphasising the importance of accumulating superannuation.
As a consequence, the Government is encouraging us to remain in the workforce beyond the traditional retirement age.
A transition to retirement strategy allows you to supplement your income by drawing a regular pension payment from your super fund.
There are a few ways you can benefit:
A transition to retirement pension may also help reduce your overall tax bill while boosting your total super balance before you retire.
This is how it works. You contribute part of your salary to super (where it is generally taxed at a maximum of 15 per cent2 rather than at your marginal tax rate). You then move your super money into a transition to retirement pension and use the pension income to supplement your reduced salary. The tax-effectiveness of the pension payments can help lower your overall personal tax liability. Note that from 1 July 2017 earnings on transition to retirement pensions are taxed the same as your accumulation accounts.
Under current superannuation law you must reach your preservation age before you can access your super. Your preservation age depends on the date you were born.
| Date of birth | Preservation age |
|---|---|
| 1 July 1960 – 30 June 1961 | 56 |
| 1 July 1961 – 30 June 1962 | 57 |
| 1 July 1962 – 30 June 1963 | 58 |
| 1 July 1963 – 30 June 1964 | 59 |
| After 30 June 1964 | 60 |
| Date of birth | Preservation age |
|---|---|
| 1 July 1960 – 30 June 1961 | 56 |
| 1 July 1961 – 30 June 1962 | 57 |
| 1 July 1962 – 30 June 1963 | 58 |
| 1 July 1963 – 30 June 1964 | 59 |
| After 30 June 1964 | 60 |
Your transition to retirement pension income stream is non-commutable apart from any unrestricted non-preserved components within it. Non-commutable means you can’t convert the income stream into lump sum cash until you satisfy a full condition of release from super, such as retirement or turning 65. However you can stop the pension anytime you want to.
Your transition to retirement pension will work in a similar way as a standard superannuation pension, subject to the non-commutable requirements and restriction on the amount of pension you can withdraw. You can withdraw between 4 per cent and 10 per cent of the pension account balance each year and have the flexibility to vary the payment at any time during the year, within these set ranges.
You should also keep in mind the possibility of your career not going exactly to plan – a redundancy or a forced or unplanned early retirement could interrupt this strategy and mean that you will have to review your circumstances with your financial adviser.
Another important point to consider is the concessional contributions cap of $25,000. Also, these income streams are not exempt from earnings tax ie up to 15 per cent tax applies on earnings within the fund.
If you plan to use this strategy through a self-managed super fund, you should ensure that the trust deed is drafted to allow you to commence any pension allowed under super law.
Once you have reached age 60, your pension payments and any lump sum withdrawals will generally be tax-free. Under age 60 there may be personal tax payable on the pension payments.
A financial adviser can help you to structure your pension to legally minimise your tax obligations.
DMFS Financial Advisers Pty Ltd, ABN 71 158 044 476, is a Corporate Authorised Representative of AUS Financial Advisers Pty Ltd (ABN 89 159 536 151 AFSL 534501).
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