Thinking about retirement but not ready to stop working yet?
27 September 2018
Retirement can feel like a very final decision and one which the majority are not ready to take immediately. Fortunately, the Transition to Retirement scheme gives you the opportunity to ease into your non-working years without taking a big cut to your income.
So what is the Transition to Retirement scheme, what are the benefits and how does it work?
Transition to Retirement scheme - what is it?
Previously, working Australians could only access their super funds once they turned 65. However, the Transition to Retirement (TTR) scheme allows Australians who have reached their required preservation age to access their super whilst continuing to work. This in effect presents two options for eligible parties:
- You can reduce your working hours to make them more manageable and give you more time to relax, without actually reducing your overall income.
- By maintaining your current work hours you can use the TTR in conjunction with increased concessional super contributions to make significant tax savings in the run-up to full retirement.
The Transitional Retirement scheme can support you working reduced hours, so you can spend more time with the ones you love
How does it work?
If you are younger than 65 when starting a TTR scheme you can draw between 4% and 10% of your super savings per year. Under 65s can access their super benefits only as a non-commutable stream, which means you will need to set up regular payments rather than transferring a lump sum.
In order to start a TTR pension, you will need to set up an account based pension account alongside your accumulation account. Most super providers offer a pension option which you can easily access. However if yours does not, you can open a pension account with a separate provider and still connect it to your super fund.
Your super savings can then be transferred to the pension account, and it is from here that you can withdraw the necessary funds. Remember to leave at least a small balance in your accumulation fund so your employer can continue to make contributions to your account.
If you have second thoughts at any point or your situation changes, you can roll your TTR pension back into your super account.
TTR to reduce your work hours
Access to some of your super gives you the financial support you may need to reduce your work hours whilst maintaining your current living standards. By regularly withdrawing from your TTR pension you can top up the difference in your salary so that your overall income is the same as when you were working full time.
TTR allows you to maintain your current income level
The benefits of this approach are:
- Your employer is still obliged to contribute to your super fund so you can continue to grow your nest-egg whist easing into retirement.
- It gives you the time to slowly wind down into retirement rather than an all or nothing decision.
- The ability to supplement your income with your TTR pension means that you can maintain your living standards as if you were working full time.
It is however worth bearing in mind that this strategy will reduce your overall super amount for when you wish to retire completely.
How to use the TTR to save on tax
Even if you plan to continue working full time for the time being, you can still take advantage of the TTR pension if you have reached the required age. By salary sacrificing to the concessional contribution limit into your super fund, then topping up the difference by withdrawing from your TTR pension, you can reduce the amount of tax payable on income without reducing your overall income.
The benefits of this are:
- You will pay less tax on your income as in most cases your pension payments will be tax-free.
- You will also pay less tax on your super contributions.
- This strategy will give your super savings a boost so you have more to play with when you decide to retire.
Remember that this strategy requires careful planning and the margins on tax may not be worth it for everybody. It is best to discuss this plan with a financial planner before actioning anything.
Talking to a financial planner is the best way to get the TTR strategy to match your retirement goals
What do you need to consider?
The Transition to Retirement scheme is a great option for many people, but as with any financial decision, it must be considered carefully before you take action. Here are several aspects that you should look at before proceeding with a TTR strategy:
- What are your income needs? Do you need to maintain your current income level or will a reduction in salary be manageable without making up the difference? Once mortgages are paid off many people can afford to live on less.
- What is your fund type? TTR pensions are only accessible to those with an accumulation super fund. Defined benefit super funds will not be able to take out a TTR pension.
- Remember your life insurance. If you have life insurance through super, check to make sure it will not reduce or cease with the switch to a TTR strategy.
- What are your social security entitlements? Social security benefits may impact your pension entitlements. Make sure to speak to a financial planner if you or your partner receive social security.
If you want to learn more about whether a TTR strategy could be the right path for you, get in touch with one of LGS financial planners today.
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