Provided by Mercer: 22/4/08
If you’re currently aged 55 or more, you can transform a modest transition to retirement strategy by pulling the right levers, in the right combination at the right time.
Transition to retirement provides you a way of moving from work to retirement with increased flexibility. This facility lets you use your superannuation savings (including the preserved portion) to commence a pension. Thus you can receive a regular income from you super savings as well as the salary from your employer.
So, you can reduce your working hours without retiring permanently or experiencing a drop in income by creating a supplementary income stream from your super. Importantly, this increased flexibility also lets you re-organise your finances to maximise your income and super contributions, and save tax.
If you plan to continue working the same hours as before, you could use a transition to retirement pension strategy to make your super contributions more tax effective, helping to boost your super balance in the run up to retirement.
To do this, you transfer some or all of your savings from super to a transition to retirement allocated pension. You then draw your income from this pension (which is tax free), while you continue to work and contribute to your super fund via salary sacrifice (paying only 15 per cent contributions tax – subject to limits).
To maximise all the possible benefits, transition to retirement plans require considerable financial knowledge to implement. Consider the following techniques, for example.
Using two transition to retirement allocated pensions
Many super members have unrestricted non-preserved super benefits. These are super benefits that can be paid to a member at any time provided the fund’s rules allow payment (and subject to tax).
If you have both a “preserved component” and an “unrestricted non-preserved component” in your account, you can employ a technique to make your savings last longer. This technique involves commencing a separate allocated pension with the unrestricted non-preserved part of your super savings, rather than having one transition to retirement allocated pension made up of all your super.
If you commence one transition to retirement allocated pension with all your super savings, then the unrestricted non-preserved component is drawn down first, which over time will reduce your access to lump sum withdrawals.
Also, the earnings of a transition to retirement pension are preserved (even the earnings on the unrestricted non-preserved portion). However, the earnings of an allocated pension, which has been commenced, using only unrestricted non-preserved super, are also unrestricted.
Managing cash flow
In our experience, it’s usually worth implementing a transition to retirement strategy in a particular order to maximise your situation. As these strategies re-organise the source of your income, a financial adviser can help ensure the flow of payments begins and continues smoothly.
For example, after your financial adviser has established your transition to retirement pension, it’s recommended you ensure super pension payments have begun before starting any salary sacrifice amounts (which are often an important part of these strategies). This will allow for an uninterrupted cash flow.
Receiving a full year’s super pension
The income from a transition to retirement pension is capped at 10 per cent - it is possible to receive a full year’s pension payment, even if only commencing a transition to retirement allocated pension in May, before the end of the financial year. This can be useful if you need access to an amount of your savings, to pay off a mortgage for example. Pension payments can be adjusted for the following year.
Accessing a health care card
Depending on the level of your income, salary sacrifice and transition to retirement pension, it may be possible to qualify for the social security Low Income Health Care Card. Again, your financial adviser will be able to help determine whether this is the case.
Using a transition to retirement allocated pension while building super
If you have a large amount of savings in a super account and don’t need additional income, a transition to retirement allocated pension may still be worthwhile. Remember, the investment earnings of a super pension are tax free while they remain in the super fund. In the event you have surplus income, you may reinvest the surplus, re-contribute the amount back as a non concessional contribution (which will be subject to limits) for you or your spouse; or you may gift the funds (to children, charities etc.).
Surplus income can be used in a variety of ways to build your super or help meet other financial goals. A financial adviser, who understands your situation and the tax and savings implications, can help you make the most of this surplus.
There are many transition to retirement strategies for different circumstances. Many strategies are not obvious and require expert advice to execute. If you’re looking to lift your retirement strategy to the next level, speak with a licenced or appropriately authorised financial adviser for the “inside know-how”.
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.
