With all the talk of potential changes to superannuation, along with increasing personal tax rates and government levies, it seems harder than ever to get ahead. However, there still remains a key strategy anyone over 55 must consider.
Transition to retirement (TTR) was a concept the government introduced in July 2005 to encourage Australians to gradually reduce their working hours, rather than retire fully, thus remaining in the workforce for longer. To enable this, a transition to retirement strategy lets you start start drawing money out of super as an income stream to top up your employment income, allowing you to continue working, although at a lesser level of income. This has been an excellent initiative to encourage people to remain in the workforce.
However, most people who use the strategy do not, in fact, cut their working hours. “Hang on a second” I hear you say. “What is the point then?” Well, this is where I come to the free lunch.
One recent positive change to superannuation has been the increasing amounts that can be contributed to a super fund – specifically, the pre-tax (concessional) contributions.
So, in 2014/15, for those 49 or over on June 30, 2014, the concessional contribution cap will be $35,000. For employees, these contributions are employer and salary-sacrifice contributions. For those who are self-employed, they are personal tax-deductible contributions.
So, a clever way to use the transition to retirement strategy is to salary sacrifice income into superannuation up to the concessional contribution cap (the one that has increased this financial year). Simultaneously, one can then start a superannuation pension and replace the salary-sacrificed income with that pension income. The super pension income is tax-free for those aged over 60 and concessionally taxed for those under 60.
So, how effective is the strategy really? Well, a 60-year-old earning $100,000 a year, with a superannuation balance of $300,000, could benefit by about $5000 to $10,000 a year.
Note that, particularly for those under the age of 60, it is important to work through the options in order to calculate the amount of salary sacrifice and pension income to optimise the strategy. There are other tips and traps to be aware of when considering a transition to retirement strategy, so make sure you seek professional advice to achieve the best outcome … and get that free lunch.
Source: Thabojan Rasiah, The Age, 2014