Your super isn’t just an ideal investment to save for retirement. Superannuation savings can also help to shape decisions about when you decide to hang up your work boots and how you manage your transition out of the workforce.
It’s all thanks to a type of product called a transition to retirement (TTR) pension. This allows you to access your super while you are still in the workforce and it’s an option that has led to the development of two handy transition to retirement (or pre-retirement) strategies.
Perhaps the most popular option is an ‘income swap’ strategy. This generally suits pre-retirees hoping to ramp up their super savings ahead of full time retirement.
In practice, it involves making additional super contributions via salary sacrifice (where your employer pays part of your pre-tax salary into your super fund rather than directly to you), while making up the difference in take home cash with payments from a TTR pension.
The second type of strategy focuses on replacement of income. Here, you may choose to wind back your working week and use the funds provided by a TTR pension to enjoy the same level of after-tax income even though you are working less.
A transition to retirement strategy may sound easy on paper, but there are generally three key aspects of a TTR pension that call for professional financial planning advice.
TTR pensions are only available when you reach preservation age. That’s the age at which, by law, you can access your super. This age limit is steadily rising, and Australians born on or after 1 July 1964 won’t reach preservation age until age 60.1 That’s not to say there is no merit in talking to your adviser about a TTR strategy at an earlier stage.
Some advance planning is always worthwhile and this leads to another consideration - not all super funds offer TTR options.
If you’re thinking of using a TTR strategy at some stage, it can be worth talking to a financial adviser to find out if your fund provides a TTR option. If not, it may be worth asking about whether to switch to a fund that offers this option. If you use a self-managed super fund, the trust deed will need to allow TTR income streams.
Assuming you tick all the eligibility boxes, it can be tempting to focus on how much you can draw down on a regular basis through a TTR pension. But your super may need to last a long time.
That makes it important to consider ‘when is the right time to embark on a TTR strategy?’ As longevity rates continue to climb, anyone tapping into their super via a TTR pension at, say, age 56, may need to tread carefully. You could live to age 90 or older and the earlier you access your super, the greater the potential risk of outliving your nest egg.
This makes it critical to look at how much can be drawn down via a TTR pension to meet your needs today while still providing sufficient super savings to enjoy a comfortable tomorrow. There is no one-size-fits-all answer here and it pays to speak with a financial adviser about tailoring a TTR strategy to your personal needs.
Regardless of whether you are aiming for an income swap or income replacement strategy, your TTR plan needs to be reviewed annually so that income streams and/or super contributions can be fine-tuned in line with your circumstances.
Talk to your financial adviser to see which course of action works best for your circumstances and if you can ease your way into retirement sooner. A TTR pension can be an opportunity to have your super cake and eat it too while leaving the workforce on your own terms.
1Accessing your super – ATO website - https://www.ato.gov.au/Individuals/Super/Accessing-your-super/
This information is current as at 15/08/2016.
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs.
This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Before requesting a super transfer, we recommend that you check with your other funds to see if there are any exit fees for moving your benefit or other loss of benefits such as insurance. We also recommend you to check with tax professionals to see if there are any tax implications.
Generally, contributions to a superannuation fund are preserved. The government has placed restrictions on when you can access your preserved benefits. In general, benefits will not be able to be paid until a member is age 65, or has permanently retired and is above his/ her preservation age (i.e. 55 years up to 60 years depending on when the member was born).
The Government has set caps on the amount of money you can add to superannuation each year on a concessionally taxed basis. Currently the cap is $30,000 per person pa for the 2016/17 financial year. If you are aged 49 or over on 30 June 2016, the annual cap is $35,000.
In addition, the government has set a non-concessional contributions cap. The cap is $180,000 per person pa. Those under age 65 can ‘bring forward’ two years’ worth of personal contributions, allowing them to contribute up to $540,000 per person over a three year period. However, in the Federal Budget announced on 3 May 2016, the government proposed to introduce a lifetime cap of $500,000 on non-concessional contributions, which would include non-concessional made since 1 July 2007. For more detail, speak with a financial adviser or visit the ATO website.
The tax position described is a general statement and is for guidance only. It has not been prepared by a registered tax agent. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual situation may differ and you should seek independent professional tax advice.
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