Who can use this strategy
* You must have reached your preservation age Your date of birth | Preservation age | Before 1 July 1960 1 July 1960 to 30 June 1961 1 July 1961 to 30 June 1962 1 July 1962 to 30 June 1963 1 July 1963 to 30 June 1964 After 30 June 1964 | 55 56 57 58 59 60 |
- You are still working but want to cut down your hours
- You will need a sufficient super balance to draw your pension from
- You must take your super benefit as a non-commutable income stream. This means you will not be able to convert your super into a lump sum payment at anytime, subject to limited exceptions.
Benefits of this strategy - Take advantage of the lower superannuation tax rate
- Reduce your working hours while maintaining your lifestyle
- Vary the level of income from your pension within government limits.
How the strategy works
Take Olivia for example. She is 60 years old and is looking to cut down her working hours as she approaches retirement. Olivia currently has around $450,000 saved up in her super fund. With her reduced hours, Olivia's annual salary will be $80,000 before tax. Olivia wants to reduce her gross income so she pays less income tax while continuing to contribute to her super fund. She does this by supplementing her working income with a pension paid from her super fund. Olivia decides to contribute half of her income, $40,000, into her super fund through salary sacrifice. She draws an equivalent amount from her superannuation fund in the form of a pension. The following table shows how much better off Olivia is keeping her money in super using the transition to retirement strategy rather than investing outside super. | Transition to retirement strategy | Non-super strategy | Gross income | $80,000 | $80,000 | Salary sacrifice | $40,000 | $0 | Employer income (less salary sacrifice) | $40,000 | $80,000 | Tax payable | $7,950 | $21,050 | Pension income | $40,000 | $0 | Net income | $72,050 | $58,950 |
Assumptions: the above example does not take into account super fund entry/exit fees. Check that your fund pays transition to retirement benefits. The example assumes the Superannuation pension tax offset is claimed and does not take into account investment returns/losses before withdrawal. The result shown depends on the particular facts and assumptions and would be different if these were to change. As the table shows the transition to retirement strategy gives Olivia a significant advantage, giving her a net income of $72,050 compared to $58,950 if she invested outside super. This advantage becomes even more pronounced after 1 July 2007 when income returns from her retirement pension contributions become tax free. Smart Investing
By Robin Bowerman
8 September 2006
Principal & Head of Retail, Vanguard Investments Australia
www.vanguard.com.au
29th-March-2007 | 