Deciding when to retire is a big decision and requires careful consideration, especially if you are feeling a little uneasy about your retirement income.
The average age of Australia’s 4.2 million retirees is 56.9 years but many people choose to finish work a little later with most of the nation intending to retire at just over 65 years.
If you’re not quite ready to retire, a ‘transition to retirement’ (TTR) strategy might be the best next step for you to take. A TTR allows you to ease into retirement by:
- supplementing your income if you reduce your work hours, or
- boosting your super and save on tax while you keep working full time
This strategy allows you to access your super without having to fully retire and it is available to anyone 60 years or over who is still working.
Reduce your working hours without significantly reducing your income
The strategy involves moving part of your super balance into a specialised super fund account that generates an income stream. With this account, you can withdraw up to 10 per cent of your balance each year.
Since you’ll still be earning an income and making concessional (before-tax) contributions to your super, this approach allows you to maintain income during the transition to full retirement while still increasing your super balance – provided the contributions continue.
Keep in mind that, as a general rule, you can’t access your super benefits as a lump sum cash payment while you’re still working. You need to take it as regular payments. However, there are some exceptions in special circumstances.
Take the example of Alisha. Alisha has just turned 60 and currently earns $50,000 a year before tax. She decides to ease into retirement by reducing her work to three days a week.
This means her income will drop to $30,000. Alisha transfers $155,000 of her super to a transition to retirement pension and withdraws $9,000 each year, tax-free. This replaces some of her lost pay.
Income received from your super fund under a TTR strategy is tax-free but note that it may affect any government benefits received by you or your partner.
When you are looking into your own Transition to Retirement strategy it is important to check on your super fund’s life insurance cover, in case a TTR strategy reduces or stops it.
Give your super a boost
If you’re planning to continue working full-time beyond age 60, a TTR strategy can be used to increase your income or to give your super a boost.
To make this strategy work for you, consider increasing your salary sacrifice contributions into your superannuation. Then, use a TTR income stream from your super fund to replace the cash you’re missing out on due to salary sacrificing.
In another example, Kyle is 60 and earns $100,000 a year. He intends to keep working full-time for at least another five years. Kyle transfers $200,000 from his super to an account-based pension so he can begin a TTR strategy. He then salary sacrifices additional contributions into his super. While this reduces his income tax, it also lowers his take-home pay. To make up for this, Kyle withdraws up to 10 per cent of his TTR pension balance each year, boosting his income.
A TTR strategy works especially well for those with a larger super balance, a higher marginal income tax rate and those who have not reached the concessional contributions cap.
However, it can still be beneficial for those with lower super balances or lower incomes, though the advantages may not be as significant.
Some things to think about
A transition to retirement strategy may not be the right fit for everyone, but it can be a great option for many. Keep in mind, you can only withdraw up to 10 per cent of your super balance each year.
Also, if you start accessing your super early, it will reduce the amount of money available for you when you retire.
The rules for a TTR strategy can be complex, particularly if your employment situation changes or you have complex financial arrangements. So, it’s important to seek professional advice to make sure it works for you and your personal situation.
Next steps
With much to consider, our knowledgeable team at Nexia Australia can help. Contact a Nexia adviser to develop a retirement plan that works for you.
