Transition to Retirement
When the End is Ubiquitous: Retirement’s Toll on Your Finances
In my ideal world, everyone would keep working past their retirement date up until they are satisfied with the work they have dedicated their lives to. If this sounds more of a nightmare than a desire, then maybe your definition of what “work” really is differs from what I have in mind.
In the real world, financially independent people, upon reaching the milestone of 55, retire. Nowadays, though, most of the Australian working force works past 55. Why? Some still need the money, some are in it for the continuous mental stimulation, or for the social interaction they have gotten used to after decades of working.
Some opt to keep working past their preservation age while reducing working hours as a way to gradually ease into retirement – this while drawing down some of their super benefits – as a strategy for boosting super savings and tax minimization. This policy, known as the ‘Transition to retirement’ pension scheme, allows you to continue working full-time and boost super, or reduce hours and supplement your employment income. It enables Australians who have reached their preservation age (at least 55) to access super as pension income without having to retire (yet!).
And now, before taking the plunge…
Assess your personal circumstances to determine whether a transition to retirement pension is what you need. Consider these:
- Income needs and lifestyle – What are your income sources? And what will you need the extra income for? Most people see lower income needs as they approach retirement, can afford to salary sacrifice into super, without the stress of having to think about replacing lost income. How much can you draw down from your super?
- Retirement strategy – Boost your super or work, but for less hours? Part of your super account will be used to open your retirement account.
- Tax implications – If the tax you pay on your salary sacrifice contributions is less than what you will pay on your salary, the tax savings will be turned into extra super. Payments from a retirement income account are tax-free. Have a seat with your financial adviser to help you assess your individual situation and the tax implications.
- Fund type – Do you have accumulation super funds or defined benefit funds? Unlike the first, members of defined benefit funds cannot access a Transition to Retirement pension. You may also want to check if your existing super fund offers a TTR pension.
- Loss of benefits – Check with your financial adviser to make sure you don’t have life insurance with your super fund, as you may lose insurance benefits if you transfer some of your balance to a TTR account.
Weigh the benefits against the drawbacks of this complex strategy. To see if this is the right retirement strategy for you, seek for financial advice. Personally, however, I know I would have many more questions to raise. And if you do think a TTR pension is right for you, but like me, you admittedly know little, you may also want to ask the following questions:
- Is there a maximum annual income limit?
- Can I turn my pension into a lump sum?
- When can I make a lump sum withdrawal?
- What is the concessional contribution cap?
- What are the tax benefits of Transition to Retirement pensions?
- How will my TTR pension affect my other funds?
Less tax, more super? A transition-to-retirement pension may be the answer. June 25, 2015 (http://www.superguide.com.au/accessing-superannuation/accessing-super-early/less-tax-more-super-transition-to-retirement-pension)
Transition-to-retirement pension (case studies): How does a TRIP work? June 25, 2015 (http://www.superguide.com.au/accessing-superannuation/accessing-super-early/transition-to-retirement-pension-how-does-a-trip-work)