Provided by Mercer: 24/10/08
You don't have to be.
One in four working Australians aged 50 and over expects to be working until their 70s and more than 40% are unsure how much they’ll need in retirement. They’re some of the findings from research1 recently released by Mercer.
The link between these two findings seems fairly clear. Unsure whether they’ve got enough superannuation saved to live on in retirement, Australians are resigning themselves to working longer. Recent stock market declines have made the situation even more uncertain.
So if you’re in this situation, are you trapped in the workforce?
Not necessarily.
In 2005 “Transition to Retirement” was introduced. It is a measure that allows people who have reached their preservation age to commence a non-commutable income stream using superannuation savings, even while they continue to work. Previously, people could usually access their super savings only when they permanently retired from the workforce, after reaching their preservation age.
All clear? A few definitions and explanations should help.
Preservation age varies and is dependent on the year you were born. If you were born before 1 July 1960, it’s 55. If you were born between 1 July 1960 and 30 June 1961, it’s 56. It then progressively increases until, for those born after 30 June 1964, the preservation age is 60.
A non-commutable income stream – which may also be called a transition to retirement allocated pension, a transition to retirement account based pension or a transition to retirement pension - is a regular periodic payment of income from your superannuation. Generally, you can’t receive any amount from your superannuation as a lump sum payment.
People aged 55 and over may use transition to retirement pensions to:
1. Work less for the same income.
2. Save more super, without reducing the income you currently live on.
Note: These are not the only ways a transition to retirement pension can be used.
1. Work less for the same income.
Mercer’s research found that nearly half (48%) the people surveyed who were aged 50 and over, want to progressively decrease the amount they work. A transition to retirement pension may allow you to access your super and receive extra income to supplement your reduced income if you have reduced the hours you work.
Example
Max is 61 years old, wants to play more golf and work only four days a week.
On a salary of $60,000 he would decrease his net income by $7,390 if he didn’t use a transition to retirement pension.
By setting one up, Max uses $185,000 of his super account and takes the minimum pension payment of 4% (which is equivalent to $7,400). As he is over 60, this is
tax-free and his overall net income hasn't changed.
2. Save more super without reducing your income.
Not sure you’ve enough to fund the lifestyle you want in retirement and needing to turbo charge your superannuation? A transition to retirement pension may allow you to save more super without reducing your existing income.
The process works in the following way:
Step 1. Make additional salary sacrifice contributions to your super, on top of your regular employer contributions. These contributions are usually taxed at 15%, relative to marginal tax rates, which can be as high as 46.5%.
Step 2. Make a one-off transfer from your super to your Transition to Retirement Allocated Pension.
Step 3. Draw income from your Transition to Retirement Allocated Pension. This income is tax-free if you are aged 60 and over or tax-effective if you are aged 55-59.
Example
Marie, 60, wants to increase her superannuation prior to retirement at age 65.
Marie is currently on a salary of $80,000 and estimates that the net income required to support her lifestyle is $45,000. Her superannuation account balance is currently worth $300,000.
She converts $295,000 of her super to a transition to retirement pension retaining $5,000 in the account and leaving it open to accept future salary sacrifice contributions of $46,000 pa.
Drawing a pension of 5% means that after-tax income for Marie, comprised of both net salary and the pension payment, will be $45,580. At the same time, Marie’s additional superannuation contributions increase by $24,350 each year, after allowing for the superannuation contributions tax of 15% and pension drawdown.
The Transition to Retirement Allocated Pension (TRAPs) has a somewhat unfortunate acronym and there are a number of issues you should consider before setting up a Transition to Retirement pension.
In particular:
- How much of your existing super savings do you want to allocate to your pension account? There is usually a minimum balance set by the administrator of the fund.
- How much income do you want to receive? The government sets minimum and maximum limits.
As always, much depends on your individual circumstances so speak to a licensed or appropriately authorised financial adviser to find out whether transition to retirement is the right strategy for you.
To speak with a Mercer financial adviser about a transition to retirement strategy, call
1800 633 403.
1 2008 Benefits Outside the Square Study, Mercer, October 2008
This information has been prepared by Mercer (Australia) Pty Ltd ABN 32 005 315 917 for general information only. The information does not take into account your personal objectives, financial situation or needs. Therefore, you should not act on this information if you have not considered the appropriateness of this information to your personal objectives, financial situation and needs. You should consult a licensed or appropriately authorised financial adviser before making any investment decision.
