Transition to Retirement
Retirement used to be about extremes. You either worked or you retired. Changes to the super rules back in 2005 have opened up new opportunities for people over 55.
Whether your retirement is 10 years off, or just around the corner, if you’re over 55 you have the ability to access your super as an income stream. This has allowed opportunities that provide a number of new pathways to retirement.
You might want to cut your hours without taking a pay cut, or you may be looking for ways to ‘turbo boost’ your super in the last few years before retirement, without compromising your current lifestyle.
Or you may simply be looking for a smarter way to arrange your finances so that less money goes to the tax office and more goes into your pocket. Whatever your circumstances, accessing your super via a transition to retirement pension could get you onto your chosen path to retirement.
Path 1- Cut your hours, not your income
If you have every thought about retiring but don’t feel you are ready financially or emotionally just yet, then working part time could be an option for you. Of course while many of us may have dreamed of cutting back our hours, for most it just simply isn’t possible – because less hours means less pay.
Starting a transition to retirement pension at the same time that you reduce your hours could mean, depending on your particular circumstances, you end up with the same net income as when you were working full-time, so you don’t have to compromise your standard of living.
Path 2 – Grow your super faster without compromising your lifestyle
For most people, maximising their superannuation balance is the most important element of their plans for retirement. Depending on your circumstances, one of the most tax effective ways to contribute to superannuation is via salary sacrifice.
Salary sacrificing into superannuation simply involves giving up some of your pre-tax salary in exchange for additional contributions into your super. The benefit is that the portion of your income that you salary sacrifice is not taxed at your marginal tax rate and is instead taxed at the concessional rate of 15%. Depending on your circumstances this could represent a significant tax saving.
While salary sacrificing can be very attractive, it does mean cutting your take home pay. For many people, their current commitments make this option unrealistic. However, if you are 55 or over, a transition to retirement pension could allow you to top up your pay with an income stream from your existing super.
The self-employed can also take advantage of this opportunity. Instead of salary sacrificing your pay into super, you can make tax deductible contributions to super and start a transition to retirement pension to achieve the same result.
Depending on your circumstances, if the amount you are drawing down from your super to top up your reduced pay is less than the extra money you are now putting into your super through salary sacrifice then your overall super should grow.
Path 3 – Draw an income from your super for financial flexibility
Drawing an income stream from your super whilst you continue to work could also open up a number of opportunities, such as:
- Improving your current lifestyle
- Reducing debt
- Growing other assets
Obviously, thought needs to be given to the consequences of drawing down your superannuation ahead of your eventual retirement, but depending on your circumstances the emotional and/or financial benefits of this approach could be significant.
