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 ASK THE EXPERT |
 Advisor Lounge
Transition to Retirement strategy – is it tax effective?
Paul Jackson MacDonnells Financial Services
July 03, 2008
Question:
I will be turning 55 next financial year. All I have read or heard from the commentators are it is beneficial to start a transition to retirement pension (TRP). Is it a tax effective strategy for everyone over the age of 55? Would you please give some examples where TRP is not a good tax planning?
Many thanks, Sidney
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Today's expert:
Paul Jackson, MacDonnells Financial Services |
Answer:
Thank you Sidney, a "Transition to Retirement" strategy involves commencing a pension from your superannuation benefits while you are still working, and at the same time salary-sacrificing any surplus income back into a new superannuation fund. The concept was initially devised to provide financial assistance to those wishing to migrate to retirement by working part-time for a period before finally leaving the workforce. The strategy was immediately jumped upon by full-time workers who were looking for an opportunity to boost their retirement savings. And there are very good reasons for this. You are allowed to start a pension if you are over age 55 for those born before July 1960, and over age 60 for those born after July 1964.
The benefits from commencing a "Transition to Retirement" pension arise for three reasons:
1. Once you start a pension the tax on fund earnings reduces from 15% to nil.
2. Any pension payments are taxable, but are accompanied by a 15% rebate for those under age 60, and are totally tax-free for those over age 60.
3. Excess income can be salary sacrificed back into super, saving some tax along the way and helping you accumulate even more benefits for your retirement.
Some examples:
Rob is 55, he earns $75,000 pa, and has $400,000 in superannuation. Normally Rob would take home $56,775 pa after tax. If Rob started a Transition Pension drawing $40,000 pa, and at the same time salary sacrificed $49,459 pa back into another Super Fund (after contributions tax this would be $40,000 net returned to Super) he would end up in a similar position with only $56,296 pa as take-home pay. However he would be saving approximately $2,400 in earnings tax on his Pension and that should be reflected as additional retained earnings within the fund.
Now Rob's older brother James is aged 60, and he also earns $75,000pa, and also has $400,000 in superannuation. James's transition pension is totally tax-free so he is left with $62,227 pa take-home after salary sacrificing $49,459 pa (net $40,000 pa) back to superannuation, as well as saving roughly $2,400 in earnings tax. This is $5,931 pa better than Rob.
The benefits from this strategy would be of negligible help for someone with a very low income (say below $6,000) and a small super benefit, and would steadily increase in savings as your income and the size of your benefit increases.
Once you reach age 60 and can receive pension income totally free-of-tax the benefits are quite lucrative. I would strongly recommend that anyone working past age 60 to seriously consider this strategy and seek advice accordingly.
Disclaimer: This article is general in nature and is not intended as investment advice. Readers should always seek further advice before making any financial decisions.
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