Under the transition to retirement rules, if you have reached your preservation age, you can reduce your working hours without reducing your income. You can do this by topping up your part-time income with a regular ‘income stream’ from your super savings.

Under these rules you can only access your super benefits as a ‘non-commutable’ income stream. A non-commutable income stream is one that cannot be converted into a lump sum. This generally means you cannot take your benefits as a lump sum cash payment while you are still working. You must take your super benefits as regular payments.

Employers still need to make compulsory super guarantee contributions for all their eligible employees, including people on transition to retirement.

An example:

David is 60 years of age, earns $58,800 p.a. ($47,300 after tax), and has $405,000 in super. David wants to boost his retirement savings and gain a tax advantage by salary sacrificing and maintain his take home wage.

David salary sacrifices $29,414 into his super (taxed at 15% inside super rather than at marginal tax rate), then he transfers his $400,000 preserved super entitlements into an account-based TTR pension. To help his cash flow, he will receive tax-free pension payments of $20,000 p.a. Combined with his remaining work salary, this allows him to increase his income level.

This strategy maintains David’s income while boosting his retirement savings by thousands of  dollars in the first year alone. Maintaining this strategy for several years may result in an extra $100,000 in David’s Super balance*

How does it work?

You choose one of the following two ways:

  • Keep working full-time and boost your super through salary sacrifice.
  • Reduce your work hours and soften the drop in income

At preservation age (over 56 for many people), you can draw down a pension from your super even if you are still working.

What is your preservation age?
Date of birth Your preservation age
Before 1 July 1960 55
From 1 July 1960 until 30 June 1961 56
From 1 July 1961 until 30 June 1962 57
From 1 July 1962 until 30 June 1963 58
From 1 July 1963 until 30 June 1964 59
On or after 1 July 1964 60

 

Using Transition to Retirement is a great way to save tax and boost your super before you retire.

*Assumes

  • Investment returns in super are taxable.
  • The same employer super contributions for David’s current situation and for his TTR strategy which are 9.5% of his salary. (Your employer does not have to pay super on amounts you salary sacrifice; however, most employers will continue to pay super on your gross earnings.)
  • Investment returns based on earnings of 7% and an average tax rate of 9% on super fund earnings.
  • As David is over age 50, his maximum concessional super contribution is $35,000 for 2015/16.
  • David’s concessional contributions are taxed at 15% when they are received by his super fund.
  • David’s investment returns in super are taxed at a maximum of 15%, but may be lower if tax offsets such as dividend franking credits apply.
  • David’s investment returns in his pension account are tax free.
  • The amount of TTR pension that can be withdrawn each year by David must be between the minimum 4% and maximum 10% of the account balance.