Transition into retirement
Although this strategy requires careful planning, you can maintain your income, reduce your overall tax bill and increase your super.
The Transition to Retirement legislation was introduced to help people ease into retirement, potentially cutting back on working hours and coming to terms with their lifestyle change. To encourage this, it also allows those approaching retirement but still working to heavily salary sacrifice into super while at the same time receiving tax-effective income payments from a retirement income stream.
Adopting this strategy, your super can be boosted by your employer’s SG contributions and your additional pre-tax contributions (all taxed at 15% up to the pre-tax contribution limit. You can then top-up your income from your retirement income stream. The taxable component of retirement income stream payments are taxed at your Marginal Tax Rate of up to 45% (plus Medicare) while a 15% tax offset is also applied often reducing total tax to less than that of ordinary income.
To be eligible you must:
- have reached preservation age but be under 65
- be currently employed
- roll over some or all your funds to a retirement income stream such as Telstra Super RetireAccess®.
Who could the Transition to Retirement rules benefit?
The added flexibility that the Transition to Retirement rules afford will greatly benefit individuals over 55 who:
- have superannuation from a taxed source
- want to cut down their working hours (although there are no restrictions on the hours you work) or move into a lower paid role
- want to make pre-tax contributions from their salary whilst continuing to work full-time to take advantage of the potential tax benefits available
- are in a financial position to salary sacrifice a large percentage of their wage.
More super, less tax
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Dianna is 55 and has a current salary of $80,000 pa. She has $350,000 in a Telstra Super account including a $100,000 tax-free component. Dianna plans to work for another 5 years.
If she adopted a Transition to Retirement strategy, Dianna could transfer all of her super into a retirement income stream, while continuing to accrue employer SG contributions and her voluntary pre-tax contributions in her accumulation account.
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The comparison
Compare the difference between Dianna taking up a Transition to Retirement strategy and her continuing to accrue super as she had done prior to reaching age 55.
| |
Basic super accrual |
Transition to Retirement |
| Salary |
$80,000 |
$80,000 |
| SG contributions |
$7,200 |
$7,200 |
| Salary sacrifice contributions |
Nil |
$42,800 |
| Contributions tax |
$1,080 |
$7,500 |
| Income stream income payments |
Nil |
$33,000 |
| Net salary & income payments |
$60,950 |
$60,743 |
| Tax on assessable income |
$17,550 |
$9,185* |
| Total annual income after tax |
$60,950 |
$60,743 |
| Total super after 5 years |
$507,680 |
$525,966 |
* The tax on assessable income under the Transition to Retirement strategy includes PAYG tax on salary and tax on the income stream payments less the applicable income stream tax rebate for members aged 55-59.
Assumes 15% contributions tax, 1.5% Medicare levy, investment return of 6% compounding monthly, contributions made monthly and Telstra Super RetireAccess payments drawn monthly, inflation not taken into account, returns are net of tax and fees. Assumes income tax based on 1 July 2010 rates.
If she adopts the Transition into Retirement strategy, after 5 years Dianna could achieve:
- little change to her net salary;
- an income tax saving of $47,825, meaning her net tax saving once superannuation contributions tax has been included is $15,725; which enables her to boost her super by $18,286; and
- further tax savings and potentially higher investment returns by paying no tax on investment earnings in her Telstra Super RetireAccess account.
Get the right advice
Transitioning to Retirement can be an extremely tax effective strategy, but it does require professional help to execute. Telstra Super Financial Planning offers expert financial planning advice at no additional cost, with the aim of developing a financial strategy suited to your needs. To make an appointment, you can call Telstra Super on 1300 033 166 or request an appointment online.