Super isn't just an ideal investment to help you save for retirement. Superannuation savings can also hold the key to when you decide to hang up your work boots and how you manage that transition out of the workforce.
It's all thanks to a type of strategy called a transition to retirement (TTR) pension. This allow us to access our super while we are still in the workforce, and it's an option that has led to the development of two handy pre-retirement strategies.
Perhaps the most popular 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 (or personal contributions if self-employed), while making up the difference in take home 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.
It may all sound easy on paper but there are three key aspects of a transition to retirement pension that call for professional financial planning advice.
There can be several "˜big picture" considerations to be aware of. For starters, TTR pensions are only available from preservation age; the legislated age at which you can access your super. This is steadily rising, and Australians born on or after 1 June 1964 won't reach preservation age until age 60. That's not to say there is no merit in talking to your adviser about a TTR strategy at an earlier stage.
Good advance planning is always worthwhile, and this leads to our second overarching 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 your adviser to discover if your fund provides TTR, and if not, ask about switching to a fund offering 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.
A more salient question however may be '˜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, needs to tread carefully. You could live to age 90 or older, and the earlier you access your super, the greater the 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. It really is a case of speaking with your adviser and 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.
This review can, and should, form part of a broader review of your financial plans, and with the backing of professional advice and sensible management, a TTR pension can be an opportunity to have your super cake and eat it too while leaving the workforce on your own terms. Talk to your financial adviser to see which course of action works best for your circumstances and if you can ease your way in to retirement sooner.
The information is current as at 09/10/2015.
BT Financial Group - A Division of Westpac Banking Corporation. This document provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information does not constitute financial advice. It has been prepared without taking account of your objectives, financial situation or needs. Because of this, before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation and needs. Information in this blog that has been provided by third parties has not been independently verified and BT Financial Group is not in any way responsible for such information.