Transition to Retirement
Have you ever thought you’d like to ease into retirement, without having to retire completely? If you’re aged between 55 and 65 a ‘Transition to Retirement’ allocated pension allows you to access your super while you’re still working, full time or part time.
Transitioning to retirement is a relatively new concept which can open up a whole range of opportunities as you approach retirement. The transition to retirement option is an account-based pension that allows you to access your super as a non-commutable income stream while continuing to work. This offers some interesting possibilities in terms of both lifestyle and tax planning.
Under the transition to retirement rules, if you have reached your preservation age, you may be able to reduce your working hours without reducing your income. You can do this by topping up your part-time income with a regular ‘income stream’ from your super savings.
How can I do this?
Previously, you would have had to meet a preservation cashing condition, such as retiring after reaching your preservation age, to access preserved super.
Now, if you’re eligible you can access your super through a non-commutable income stream. You can do this by transferring all or part of your superannuation (including your preserved money) into a Non Commutable Allocated Pension (NCAP) account and drawing on it as a pension to supplement your income.
A non-commutable income stream generally does not enable you to make lump sum withdrawals, except in limited circumstances.
Am I eligible?
To be eligible to use the transition to retirement option you must:
•have reached your preservation age
•not have met a preservation cashing condition
You are not required to meet any working conditions. This means you can continue your current arrangements, work part-time or even work full-time in your job, and use your superannuation to supplement your income needs.
Your preservation age is generally the age you are allowed to access your super benefits when you stop working. The table below shows your preservation age. Once you reach your preservation age, you can access your super benefits without retiring completely from the workforce.
The tax effect of transition to retirement strategies
In most instances, you pay less tax on income generated from an allocated pension than you do on the same amount of salary, making transition to retirement strategies a tax-effective way to boost your super balance or cut back your hours.
•Low tax rate – your salary sacrifice super contributions are taxed at 15 per cent instead of your individual income tax rate as long as all your concessional contributions fall within the current cap.
•Tax concessions – aged 55 to 59, the taxable component of your transition to retirement allocated pension income is eligible for a 15 per cent tax offset.
•Tax free income – if you’re aged 60 or over, your transition to retirement allocated pension income is tax free.
•Tax-free investment earnings – the assets within a transition to retirement allocated pension generate tax-free investment earnings, which would otherwise have been taxed at up to 15 per cent within the accumulation phase (in super).
How can you use it?
You can use the transition to retirement option in a number of ways. For example, you can either:
•maintain your existing income while cutting back your working hours. An NCAP can be used to compensate for your reduced earnings, maintaining your fulltime income level. Under this scenario, your total income comes from two sources – your salary and your NCAP.
•accelerate your super savings in the lead up to your retirement. If you plan to continue working, an NCAP income stream can boost your cash flow (income), which will allow you to salary sacrifice a larger proportion of your salary than you may otherwise be able to afford to do. If you are able to utilise this strategy after age 60, it becomes even more effective as the income from your NCAP will be tax-free.
•combine full-time work with an NCAP and use the additional income for other investments outside of superannuation, in order to reduce non-deductible debt, or provide lifestyle improvements.
If you would like further information on Transitioning to Retirement please contact us.