Younger generations should arguably be in a better position to self-fund retirement at the current super guarantee rate of 9.5% which is set to rise to 12% by 2025. But the sooner they start planning their transition to retirement (TTR), the better.
Overview of TTR
With transition to retirement (TTR) you can keep working while drawing down some of your super benefits. It allows you to supplement your salary and maintain your lifestyle while you reduce work hours or salary sacrifice into super to save on tax.
The permitted withdrawal must be up to 10% of your superannuation savings in the form of a pension.
The way it works is you start a transition to retirement pension by transferring some of your super accumulation account to a super account-based pension.
You will need to leave at least a small balance in your accumulation account so that it remains open to receive ongoing employer super contributions and any voluntary contributions you make.
If you are younger than 65, you then draw down a pension income of between 4% and 10% of the pension account balance each financial year, to supplement your employment income. You cannot withdraw a lump sum.
Some of the benefits include:
- Ease into retirement – It gives you a chance to explore new hobbies and start planning what you will do with your extra leisure time before you retire completely.
- Receive contributions – You will continue to receive employer contributions which will help balance out the amount you take out in pension payments.
- Pay less tax on income – If you are aged 60 or older, in most cases, your pension payments will be tax-free. If you are aged 55-59 then the taxable portion of your pension payments will be taxed at your marginal tax rate, however you will receive a 15% tax offset.
Disadvantages:
- Less money in retirement – If you start drawing down your super early it may impact the lifestyle you can achieve when you do stop work altogether.
- Tax on Earnings – From 1 July 2017, all earnings (including capital gains) received from assets supporting a Transition to Retirement pension are taxed at 15%. Capital gains tax (CGT) will effectively reduce to 10% if the asset sold was owned for longer than 12 months. Prior to that, all earnings received from assets supporting a TTR pension were received completely tax free, just like an ordinary account based pension.
- Two Accounts – If you do start a Transition to Retirement pension, but will continue to make contributions to super (or your employer will on your behalf), then you will be required to have an accumulation account as contributions are unable to be made to a pension account. This may alter the cost of maintaining your retirement savings and increase the complexity of your financial situation.
- Age pension increase will force Australians to retire later, therefore access to their transition to retirement account will be limited.
In general, the TTR income stream is an option for you to save more and work less in the future. It helps you maintain the same take home pay that you would have had without TTR. The tax benefits received could mean you save extra in super. Therefore you do not sacrifice you super balance.
We’re here to help
A financial adviser can provide you with advice to help you to start a transition to retirement. To find out more, contact Avante Financial Services on 1300 788 650 today.
