Transition to Retirement
Imagine this - it is early 2005 and you are 58 years old.
You have decided to reduce your working hours to 3 days a week. The only difficulty you have is that you need 5 days income in order to maintain your lifestyle. But that is OK.... as you
have a reasonable amount put aside in superannuation. Why not start to draw a small pension from your super account to cover the shortfall in income?
So you give your super fund a call. Unfortunately they don’t share your view. You see, your superannuation benefits are “preserved”, meaning they can’t be accessed either as a pension (income stream) or as a lump sum, until you meet a “condition of release”. They explain that because of the preservation rules you can’t access your super benefits at age 58 unless you have retired and have no intention of resuming gainful employment. If fact, unless you retire permanently, you won’t be able to access your super until you turn 65!
The situation outlined above applied prior to 30th June 2005
In an attempt to make superannuation more attractive and to encourage people to remain in the workforce onger, even if only on a part-time basis, the Government introduced changes to legislation that would allow people who have reached their “preservation age” to draw on their superannuation benefits provided the benefit was taken as an income sum. Preservation age is 55 for people born before 1st July 1960. For those born after 30th June 1960, this is progressively increasing to 60. This change, often referred to as “transition to retirement”, took effect from 1st July 2005.
If we go back to the example above, the situation we have described is now remedied with the “transition to retirement” changes. Where a person aged 58 was not able to access any part of their superannuation benefit because they were still working, they can now start to draw in income stream or pension to supplement their income from reduced working hours.
Transition to retirement is an opportunity available to any person who has preserved superannuation benefits, has reached preservation age (i.e. 55), and is willing to take their super in the form of an income stream or pension.
The interesting thing with transition to retirement is that there is no obligation to actually reduce your working hours in order to commence a superannuation pension. Many people continue to work full-time yet draw an income from their super.
One of the recent changes to superannuation that makes this strategy even more effective for most people aged 60 or older is that the income they draw from their superannuation is now tax-free. Consider the following example – Bart is 60 and works full-time. He 65 and will probably work beyond that.
Bart commences drawing a pension from his super. As he is 60, the income he receives from his pension will be tax free. He arranges with his employer to contribute his surplus income from employment back into superannuation. As a result, he significantly reduces the amount of tax he pays which, in turn, adds to his superannuation savings.
Even if Bart was aged between 55 and 60, he could still utilise this strategy and achieve tax savings but they will not generally be as generous until he turns 60.
Transition to retirement is a strategy that should at least be considered by anyone aged 55 or over, who has savings in super (or has funds that can be contributed), and they receive income on which they pay tax. However, as every person’s circumstances are different, and the superannuation rules are complex, professional advice on the appropriateness of a transition to retirement strategy is critically important. Spend some time with your adviser and have them show you how you could benefit from “transition to retirement”.
Article reproduced with the permission of Peter Kelly National Technical Services Manager Professional Investment Services Pty Ltd ABN 11 074 608 558 A.F.S.L. Number 234951