Richard Shermon explains that in transitioning to retirement, it’s just as important to commit to lifestyle changes as it is to managing your future income.
The transitioning-to-retirement approach offers a measured and step-by-step process, both emotionally and financially, helping you to enter your next, crucial life stage with less stress.
These simple questions will help you to test your readiness to retire:
- Have I achieved my goals in the workplace?
- Do I have other employment avenues I wish to explore?
- Am I ready to have more time on my hands?
- How long do I need my retirement funding to last?
- Do I have contingency plans should my money run out?
- What type of retirement am I hoping to achieve?
- Have I shared my plans with my significant others?
- Am I organised enough for a lifetime of Saturdays?
So, if you’re satisfied that you’re ready to progress with a transition-to-retirement (TTR) strategy, then here are the details you need to know.
What exactly is a TTR pension?
The TTR pension involves using part, or all of your accumulated superannuation fund, to start a pension. This pension, known as an income stream, can be started by people who have reached super preservation age – which is 55 for those born before 1 July 1960 – but must be funded from your existing superannuation money.
The annual income that’s drawn must be above a prescribed minimum level – which is currently four per cent of the fund balance – but less than 10 per cent of the fund balance for those under the age of 65.
What are the key advantages of starting a TTR pension?
The first major benefit is that you will start to receive a regular pension payment, which you can use to supplement your income. This may also open up a number of employment options. For example, the extra income could help you to reduce the number of hours you work, as a way to ease you towards full retirement in the years ahead. Alternatively, you could perhaps consider moving to a less stressful, possibly lower-paid job knowing you can still meet your monthly expenses.
You may have even considered starting your own small business. The additional pension income may help with this transition and provide you with some additional financial support until your new venture generates enough income to support your needs.
There are also several tax benefits associated with a TTR pension.
When you reach the age of 60, the payments from the pension are also tax free. Even before you reach 60 years, part of the pension may still be taxfree (the tax-free component) with the remaining portion being treated as taxable income (the taxable component). The good news is that this taxable component comes with a 15 per cent tax offset, which reduces the tax paid on this part of the income.Therefore, if you have a low marginal tax rate, this strategy can still make a lot of sense for those aged between 55 and 60, from a tax-saving point of view. If you are over 60, then this is almost always a beneficial tax strategy to consider.
Some people leverage these tax advantages from starting a pension without actually making any changes to their work patterns or lifestyle. This very popular strategy is to effectively use the extra income from your TTR pension to increase the amount of salary you sacrifice to your superannuation or the personal super contributions you make. This would then allow you to maintain your after-tax income at the same time as increasing your overall retirement savings. This works because the tax you are paying on your concessional contributions to superannuation is only 15 per cent compared with your marginal tax rate, which can be as high as 49 per cent.
So by structuring your income differently, putting more of your pre-tax salary into super and receiving regular income from both your employer and a TTR pension, you can pay significantly less tax. That’s more super for when you retire, without having to give up any income today.
Now, there are limits to this strategy, so you should take note of the current allowable level of concessional contributions. In summary, if you are aged over 55 and considering how retirement might work best for you, then you should certainly obtain professional financial advice on whether a TTR approach is a suitable strategy.
This article provides general information only. It does not take the place of professional financial and taxation advice. See an accredited financial professional for individual-based advice. (Read full disclaimer.)