Less Tax, More Income...
Are you over age 55 and working full time but would like to boost your super savings without affecting your cash flow?
Do you want to contribute additional funds to your super knowing you will be able to access them in the near future even if you are still working full time?
... then a transition to retirement strategy might be effective for you.
Once you have reached your preservation age (generally 55), you can access some of your super benefits in the form of a non-commutable income stream (known as a transition to retirement pension), while you are still working. The income stream must be between the minimum allowable pension amount (this varies depending on your age) and the maximum allowable pension amount (10% of account balance).
- Using this income to fund additional contributions
- Cashflow improvement
- Flexible working and lifestyle options such as reducing hours of work
- Potential acceleration of wealth accumulation objectives in a tax effective manner
- Minimisation on the impact of capital gains tax
Super income streams: the tax advantage
- Pension funds pay no tax on earnings or capital gains
- If you are over the age of 60, your pension income is tax-free
- Some of the pension may be tax free and you receive a 15% rebate against your pension taxable income for the rest
Issues that may influence whether or not this strategy is of benefit to you
- Your superannuation fund’s investment strategy
- Your taxable and tax-free components in the superfund
- Your marginal tax rate
- Salary remuneration issues such as salary sacrificing
- Your unrealised capital gains position in the superfund, as well as potential buy-back/corporate actions for your underlying superannuation investments
- Potential use of other funds (eg. non-concessional contributions)
Generally you will not be able to withdraw a lump sum from the money placed into a Transition to Retirement pension until you actually retire (or reach age 65).
When negotiating a salary sacrifice arrangement, it is important to make sure your employer does not reduce your Superannuation Guarantee (SG) contributions based on the new lower take-home pay. Most employers are willing to pay their 9.25% SG commitment on the overall package (i.e. your salary before the salary sacrifice contributions have been made).