Transition to Retirement
Easing your way into retirement
Have you ever thought you’d like to ease into retirement, without having to retire completely?
Why not access your superannuation but you don't want to stop working?
Now with a new Commonwealth Government initiative you can do this, and have access to your super too.
Transition to Retirement enables you to receive a tax effective income stream from your superannuation savings whilst continuing to work. Transition to Retirement enables you to maximise your income and save tax simultaneously.
This legislative change means if you are over 55, and not yet totally retired, you can access your super even while you are still working! These rule changes open some interesting possibilities for you in terms of both lifestyle and taxation planning.
If you’re approaching age 55 or under age 65 it is worth investigating the choices that a transition to retirement pension can offer. It may be just the ticket to help create the lifestyle you desire.
There are also many people in their 50s who financially aren’t ready to retire. They’ve only just emerged from, or are still in, the heavy spending years – paying the school fees, the university fees and the mortgage. They are left wondering ‘how could those super building years have passed by so easily?
And then there’s the matter of longevity risk – or living longer than your superannuation was planned to last. Research into public sector mortality rates in 2006 found that public servants are living one to two years longer than the average life expectancy. Similarities in lifestyle and education lead to the conclusion that professionals would follow a similar trend. Even living just one and half years past ordinary life expectancy means your superannuation will need to stretch around 10 per cent further, a circumstance that a vast majority of people have not planned for.
Thanks to the wave of legislation in the past few years, there are now an increased number of avenues for people to improve their retirement plan, super and even their tax situation. In this article, we’ll demonstrate how a transition to retirement strategy could potentially help you.
A transition to retirement superannuation income stream is a flexible way to move from work to retirement. On reaching your preservation age (generally 55, but is increasing over time and may be 60 if you were born after 30 June 1964), you can start accessing superannuation (including the preserved portion) via a super pension while maintaining or reducing work hours.
Transition to Retirement creates options for people wanting to reduce their working hours but maintain or supplement their income – there is no requirement to retire permanently. But a lot of people are still confused about the transition to retirement pensions, and think they can withdraw lump sum amounts from their superannuation. With a transition to retirement pension you receive regular income however, you can only withdraw a lump sum amount under certain circumstances (including retiring permanently, or on reaching 65). There are also tax concessions. Investment earnings and capital gains on the assets used to fund transition to retirement pensions are effectively tax free – only money received regularly as a super pension may be taxable. For instance, while transition to retirement pension income may be taxed at your marginal rate, you may be entitled to a tax offset of up to 15 per cent on that income. For this reason transition to retirement pensions also offers tax advantages for individuals continuing to work full time. It is also important to remember that people who are 60 years and older do not pay tax on the income they receive from a pension (from a taxed fund). Transition to retirement pensions therefore, are a popular way to unlock preserved super and supplement the reduction in salary that comes with winding back your working hours.
How does a Transition to Retirement Income Stream Work?
Individuals over age 55 may access their superannuation in pension form. The pension is called a Transition to Retirement Income Stream.
- A Transition to Retirement Income Stream pension is available to anyone aged 55 – 64.
- The pension pays between an annual minimum pension of 4% of account balance and a maximum pension of 10% of account balance.
- No commutations (lump sum withdrawals) are available from the TRANSITION TO RETIREMENT INCOME STREAM capital.
- Once the pension receipient meets another condition of release (for example, obtaining age 65) the 10% cap is removed and full commutations are available.
- A person aged 60 or over in receipt of a Transition to Retirement Income Stream receives the income stream income tax free.
- A significant advantage of a Transition to Retirement Income Stream is that the capital underlying the pension moves into tax-free phase.
Therefore advantages of a Transition to Retirement Income Stream are:
- The payment can be varied annually within the minimum and maximum range (4% - 10% of annual account balance).
- After age 60, the income from the pension is tax-free.
- The capital underlying the pension is exempt from income and capital gains tax.
- Franking credits may be refunded as cash payments to the SMSF.
- Prior to age 60, the pension income is eligible for a deduction based on the proportion of undeducted contributions within the pension capital.
- Prior to age 60, the net pension income (pension less deductible) is eligible for a 15% tax rebate.
However, disadvantages of a Transition to Retirement Income Stream are:
- There is no guarantee how long the pension will last, as it is dependent on the level of the pension payments and the performance of the underlying investments. For a SMSF should the balance fall below $200,000 it may not be viable to continue the fund as accounting and compliance costs negatively impact the fund’s performance.
- You may not make cash withdrawals from the pension capital.
- A Transition to Retirement Income Stream does not qualify for any Centrelink asset test exemptions. Subsequently the full superannuation balance will be assessed under the Centrelink assets test.
Please note:
Various factors need to be considered when determining whether this strategy is relevant to you – including the size of your superannuation savings, your employer's ability to pay contributions to an appropriate superannuation fund and your ability to salary sacrifice additional amounts to super.
|