Ease yourself into retirement
Did you know you can now access an income from your superannuation before you retire permanently? A transition to retirement strategy could help you afford a move to part time work, or boost your superannuation balance without compromising your take home pay.
- How it works
- Who is eligible?
- Things to consider
How a transition to retirement strategy works
You can access an income from your superannuation while still in the workforce through a transition to retirement pension.
There are two ways to use the income you receive from a transition to retirement pension:
- To subsidise a move into part time work, or
- To enable you to afford to salary sacrifice more of your income to superannuation and boost your superannuation balance without the need to lower your take home pay
The maximum income you may draw from a transition to retirement pension in any year is 10% of the balance. In the first year, the maximum is 10% of the amount you used to open the pension and in future years the maximum is 10% of your balance on 1 July.
If you are a defined benefit member the amount you may transfer from your current account into a pension will be limited, but you may have the option to transfer out of your defined benefit plan and commence a pension with your whole balance. Speak to your financial planner about your options.
Transition to retirement strategy example
It works for Steve
Steve, 60, is still working full time, earning $100,000 plus 9% super, and plans to retire when he is 65. With 5 years up his sleeve he wants to bolster his retirement savings. While he will be limited by his concessional contributions cap of $50,000 a year until 2012 and then $25,000 (indexed) beyond, he looks into taking out a Russell Private Active Pension so he can start a transition to retirement strategy and salary sacrifice more into his super. He salary sacrifices as much as possible of his salary into his current super account and draws down an amount from his Pension Account (subject to a maximum of 10% of his Pension Account) so that he still has the same amount of money on which to live.
In one year, Steve can save over $8,000 in tax and can contribute this to his superannuation by putting it straight into his current account. This strategy is tax effective because income payments from a Pension Account are tax free for people over 60.
If Steve was aged between 55 and 60 he could still benefit from his strategy while maintaining the same take home pay. The level of salary sacrifice contribution would be the same, but the pension income would provide a 15% tax offset rather than being tax free. In one year Steve can save $1,995 in tax with this strategy.
Source: Russell Investments; All amounts are shown in todays dollar terms.
The illustration above is based on the Tax rates applying for the year 2009/10 (including the medicare levy). The Transitional Concessional Contribution Limit of $50,000 per annum (up to 30 June 2012) applies. We assume no tax free component for the example of the impact between 55 and 60.
Who is eligible?
You need to have reached your preservation age (see table 1) in order to take advantage of the transition to retirement provisions.
|Date of Birth||Preservation Age|
|Before 1 July 1960||55|
|1 July 1960 to 30 June 1961||56|
|1 July 1961 to 30 June 1962||57|
|1 July 1962 to 30 June 1963||58|
|1 July 1963 to 30 June 1964||59|
|1 July 1964 and after||60|
Things to consider
- Transition to retirement pensions are not commutable. This means you won’t be able to withdraw more than the maximum income (10% of the balance per year) until you retire or reach age 65. You can, however, stop the pension and transfer your benefits back into your original superannuation account.
- There is no tax on investment growth in a pension
- If you are between 55 and 60 you will be liable for tax using normal marginal tax rates, less a 15% tax offset available on pension income. Remember to take into account any income you receive from other sources (such as employment) as this will affect your marginal tax rate. The tax free proportion of your payments (if any) is not taxable.
- Those aged 60 and over can withdraw their super tax-free.
- Before-tax super contributions (salary sacrifice) may still be made to your original superannuation account. These contributions incur a contributions tax of only 15% (compared to an income tax of up to 46.5%) and can help you to build more retirement savings.
- The income you receive from the pension can affect your taxation status and eligibility for Centrelink benefits.
Speak with your financial planner to find out more about how this strategy may assist you.
Source: Russell Investment
Issued by Russell Investment Management Ltd ABN 53 068 338 974, AFS Licence 247185 (“RIM”). This communication provides general information only and has not been prepared having regard to your objectives, financial situation or needs. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation and needs. This information has been compiled from sources considered to be reliable, but is not guaranteed. Pas performance is not a reliable indicator of future performance. RIM is the responsible entity of the Russell Funds. Total Risk Management Pty Ltd ABN 62 008 644 353, AFSL 238 790 (“TRM”) is the trustee of the Russell SuperSolution Master Trust ABN 89 384 753 567 and the Russell Pooled Superannuation Trust ABN 66 730 340 245. Any potential investor should consider the latest Product Disclosure Statement (“PDS”) in deciding whether to acquire, or to continue to hold, an investment in any Russell product. The PDSs can be obtained by visiting www.russell.com.au. RIM and TRM are part of Russell Investments (“Russell”). Russell or its associates, officers or employees may have interests in the financial products referred to in this information by acting in various roles including broker or adviser, and may receive fees, brokerage or commissions for acting in these capacities. In addition Russell or its associates, officers or employees may buy or sell the financial products as principal or agent. You may contact Russell on (02) 9229 5111.