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The premise behind “Transition to Retirement” is that by allowing older Australians to access their super in the form of a pension before they had finished work, they could reduce working hours and use a super pension to make up for the lost income and in so doing they would be able to work longer, reducing the time spent dependant on welfare.
And of course some people do use it to do exactly that. Their super is converted to an income stream, a type of account based pension but with restrictions on making lump sum withdrawals and capping the annual income to a maximum of 10% of the fund balance. For those over 60, this pre retirement pension is tax free.
A pre retirement pension is half of the Transition to Retirement (TTR) strategy
Salary sacrificing means you tell your employer to pay you less and instead increase your super contributions from your pre tax salary by the same amount. You save tax as instead of your marginal tax rate, the contribution is taxed at 15%. This tax saving is collected in your superannuation and therefore you retirement savings accumulate faster.
For example, if your salary was $70,000 and you were offered a $100 per month pay rise, taking this as wages (using 2017/18 tax rates) gives you $65.50 take home pay but taking it as super gives you a net contribution of $85.
A 60 year old has a maximum pre tax contribution limit of $25,000 including employer contributions. Most people cannot afford to contribute that much to super and pay their bills.
The transition to retirement strategy is coupling a pre retirement pension with salary sacrifice to super. Anyone who has reached preservation age can do it but it works best when you attain age 60 and the pension income becomes tax free. Superannuation pre tax contributions are maximised and a tax free pension is drawn to subsidise living costs.
If your superannuation balance is low or your tax rate is low, the cost of implementing a transition to retirement strategy could outweigh the benefits. But if you are over 60, pay tax and have superannuation savings, you need to find out how the numbers stack up for you!