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Transition to your retirement

by Alexandra Middleton | 08 May 2013

What is the Australian Government’s Transition to Retirement scheme and what can it do for you?

The Australian Government’s Transition to Retirement (TTR) scheme gives over 55s the flexibility to reduce working hours without sacrificing their wage.

For many workers approaching retirement, the TTR is a way to step back from full-time hours without drastically changing their financial circumstances.

For those who are eligible and wish to remain working full-time, the TTR is also a way to boost super and make significant income tax savings.

How it works

The way the TTR works is that once you reach ‘preservation age’, which is calculated based on your date of birth and current age, you are eligible to withdraw your entire super balance, or a portion of it, into a retirement income stream.

If you choose to reduce your working hours, regular payments will be drawn from your super in the form of an account-based pension that supplements the reduction in your wage.

If you wish to continue working full-time, another option is to salary sacrifice part of your pre-tax income into your super savings.

Under the TTR, this gap in salary can then be re-plenished with your account-based pension.

Both the salary sacrifice contributions to your super and income payments from your pension are taxed at a lower rate than normal contributions.

Regardless of whether an employee is utilising the TTR, an employer is required to continue making regular super contributions to their elected super fund.

The removal of the upper age limit of 70 for super guarantee payments on 1 July 2013 is further incentive for mature workers to continue in their chosen industry.

Establishing your Preservation Age

Under previous legislation, an individual’s super contributions could only be accessed once they had retired or reached 65. Under the new TTR policy your preservation age, this being the age at which you are eligible to access your super, is calculated based on your date of birth.

Preservation age

Date of birth Preservation age
Before 1 July 1960 55
1 July 1960 - 30 June 1961 56
1 July 1961 - 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964  59
After 30 June 1964  60

Are there limits?

While there is no limit to the amount of super an individual can transfer into a retirement income stream, no more than 10 per cent of the account balance may be paid each year. The TTR dictates that while employed an individual cannot receive a lump sum payment of their super benefits.

Weighing up the benefits

In the three years following the end of the Global Financial Crisis, Chief Financial Planner at Financial Planning in the Hills, Craig Hawkins says the TTR was a good money making scheme for investors, providing they managed it properly.

However, due to the recent tax changes, which came into effect in July 2012, and the limits placed on the amount an individual can salary sacrifice into their super, Hawkins says it is no longer possible to reap “exponential tax savings”.

Hawkins explains that the tax benefits that can be made are on a sliding scale.

If you earn between $18,000-$37,000, for every $100,000 of super that you earn, your tax saving would be $400 per year.

Once you start earning over $37,000 the tax rate on your income increases, so it’s possible to increase tax savings up to $1750 per year. Once you are earning over $80,000, tax savings are upwards of $2000 per year.

 “Any money that you can save is important so people should consider it,” says Hawkins. “However, for anyone under the age of 60 the benefits are too small to justify all the fluffing around.”

The reason being that prior to the age of 60 any income paid out of your super is not tax-free.

“You would have to earn in excess of $80,000 to justify doing it under the age of 60,” says Hawkins.

Describing the TTR as simple in theory but not in practice, Hawkins suggests individuals over the age of 60 only consider the strategy if they plan to review it every 12 months.

“This is partly from a common sense point of view, but mostly because of the continual changes to superannuation rules,” he says. “This way if the rules change they aren’t losing more than they are getting.”

The biggest risk for individuals in Hawkins’ opinion is that they will set up an account-based pension without salary sacrificing. “They may have every intention but it becomes too complicated or they become attached to the extra money in their account each week,” says Hawkins.

Which ultimately means you are depleting your super without ever topping it back up.