The chance to take early retirement at age 55, and live a comfortable, well-financed life in retirement is an opportunity no one would refuse. But unfortunately for many Australians this is just not a viable option, especially those who haven’t had a lifetime’s benefit of the compulsory, employer-subsidised super regime.
Which is why many individuals nearing retirement are looking for a way to give a much-need cash injection to their super pot. With the introduction of government’s simpler super reforms in July last year, it is now possible to do exactly this by making the most of transition to retirement (TTR) rules.
You can take advantage of the transition to retirement rules by salary sacrificing part or all of your employment income into super, while at the same time beginning an allocated pension from your existing super funds. The pension provides an income while you continue working, and is tax free for individuals over 60, and carries a 15% tax rebate if you’re aged between 55 and 60.
At the same time you’re getting considerable tax benefits from salary sacrificing your income into super, paying only 15% contributions tax, as opposed to PAYE income tax rates of up to 45%.
So at what age is this strategy of most benefit? Andrew Buchan, director – financial planning at HLB Mann Judd says: “We believe that the ‘sweet spot’ is for those aged 60 or more, between now and 30 June 2012, where an individual can take a pension income stream tax-free and make contributions (both salary sacrifice and employer contributions) up to $100,000 per annum.”
Ray Griffin, managing director of Griffin Financial Services, agrees: “From a tax perspective, it is most suitable for people over age 60, but people should have very little or no debt.”
To begin a TTR strategy, you must have reached ‘preservation age’, in order to access their super benefits. This is age 55 if you were born before 1 July 1960, phasing to age 60 for those born after 30 June 1964. Buchan says: “Ideally, individuals will be aged 55 plus, earning over $30,000 pa, and have accumulated superannuation savings of $55,000 or more.”
Griffin adds: “People who are heavily indebted will have difficulty making the numbers work simply because of the overall reduced cash flow effect. But in any case, people should be focused on debt reduction as they head towards retirement – that in itself is a very sound savings strategy.”
It is also important to bear in mind that not all super fund providers offer TTR arrangements. Buchan says: “There are also minimum and maximum amounts to be taken from your account balance, and a TTR pension cannot be converted to a lump sum payment while an individual is still continuing to work.”
The fees of setting up a TTR arrangement should be minimal – and if you are able to set up the scheme yourself, no costs should be incurred at all. Once you reach retirement age, Buchan says commutation of the TTR pension back to accumulation phase is also allowed and should be at a minimal cost.
Before deciding on whether to set up at TTR strategy, Griffin suggests you first find out what your pension is worth, then check the numbers on your living costs and see if the after-tax income of the pension will cover your needs. Then you need to make an application to the super fund for the pension to commence, and notify your payroll office of your decision to salary sacrifice to superannuation.
The TTR strategy also has the Australian Taxation Office stamp of approval, which has stated that it will not apply anti-avoidance provisions where this strategy is employed. The ATO notes: “We would only be concerned where accessing the pension or undertaking the salary sacrifice may be artificial or contrived.”