Transition to Retirement

Introduction

You may have heard the term “Transition to Retirement” recently. It is certainly getting some airplay in recent advertisements on television, radio and newspapers. So what is the “transition to retirement” and how can it help?

Initially introduced as a means of allowing taxpayers over 55 years of age, an opportunity to slow down (ie reduce the number of hours worked) without having to reduce the net disposable income (by replacing the decrease in salary with a small pension drawn on retirement savings).

However, the way the rules were introduced they also allow much more creative methods of enhancing your retirement savings.

The rules work best for those high earning individuals aged over 60, however they are also attractive to lower income individuals aged over 55.

How It Works

• You salary sacrifice (arrange to have paid out of pre-tax earnings) part of your salary into super, paying only 15% tax on the contributions rather than your marginal rate.
• The amount of your salary sacrifice will depend on your earnings (higher earning taxpayers could sacrifice up to the maximum allowable superannuation deductions of $100,000, others may sacrifice enough so that their taxable income reduces to below $28,980 and take advantage of the maximum Government Co-Contribution).
• You make up the reduction in your salary by drawing a pension on your superannuation savings.
• The taxation of the pension is concessionally taxed: for taxpayers over 60 years of age – no tax is payable on pension payments; for taxpayers aged 55-60 the pension is taxed at the marginal tax rate with a 15% rebate available
• The amount of pension drawn will depend upon your circumstances and intentions (ie do you need to draw more money to retire non-deductible debt, do you draw a lower pension and build your retirement savings within your superfund).

Major Benefits

You will:

• Save tax on the salary sacrifice amount (paying 15% tax rather than as much as 46.5%)
• The income earned by your superfund on those assets used to fund your pension is now tax-free (ie the superfund ceases paying tax on income from the investments funding your pension) thus further maximising your investment savings
• You may reduce your income to the extent that you may be eligible for Government Co-Contributions

Nick Moustacas
[aff]PSWMCL1[/aff]
Phone: 02 9580 3353