You could save thousands in tax with a transition to retirement strategy

On 3 May 2016, the government announced changes that will affect this strategy, if they are legislated. The main change would be to tax pension earnings at 15% instead of 0%. Our early analysis suggests the strategy can still be very beneficial for some people – but please bear with us while we re-crunch the numbers below!

In today’s financial climate it seems there are fewer and fewer ways to legitimately save tax. But there is still one strategy available, that few Australians are aware of, although it has been around for many years. It’s called “Transition to Retirement”, and it’s available to most people aged 55 or over who are working.

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Who could benefit?

  • You must have reached your preservation age – if you were born before 1 July 1960, this is 55.
  • You must be eligible to contribute to super – if you are aged 65 to 74, you will need to be paid to work at least 40 hours in any 30 consecutive days during the financial year you are contributing. If you are 75 or over, you cannot contribute.

How does it work?

The strategy involves setting up a ‘pension’ account, and moving some of your current money in super to this account.

Because you pay no tax on your investment earnings for ‘pension’ phase money, you will save up to 15% in tax on every dollar of investment earnings on the money in pension phase – boosting your investment returns significantly.

How much tax could you save?

  • Suppose you have $300,000 in super, and it is earning 9% per year in investment returns before tax ($27,000 per year).
  • While that money remains in the super phase, you will actually only receive earnings of 7.7% after the super tax of 15% has been deducted ($22,950 per year)
  • However if you moved that money to pension phase, you would receive the full investment earnings of 9% or $27,000 in dollar terms – an additional $4,050 per year.

You can find out more at the Australian Tax office website

How much do you need to withdraw?

  • Once you have set up a pension account, by law you need to draw out at least a certain minimum amount each year depending on your age. (For people up to age 64, this is currently 4% of your balance).
  • If you are under 60, some of the amount you withdraw might be taxed, but if it is, you will receive a 15% tax rebate on that amount.

What do you do with this additional income?

What you do with the money you withdraw is up to you! You could use it to:

  • Reduce your working hours without reducing your income,
  • Boost your cashflow, or
  • Make additional contributions back into your super account to top up your retirement savings.

The best option for you will depend on your circumstances and goals. That’s where good advice comes in. We can help you work through your options and make the best decision for you. There are some costs to set up this strategy, so you need to be pretty sure the benefits would outweigh those costs before launching into it!

Get in touch today

Send us a note with a few brief details, and we’ll contact you to discuss whether this strategy might work for you. Alternatively, call us on (02) 9683 6422 to speak with one of our qualified planners.