- Published on 09 Jun 2016
- - Transition to Retirement
You may well have heard friends and colleagues talking about how a Transition to Retirement Pension is helping them to boost their Superannuation benefits in retirement.
When Transition to Retirement was originally designed, the thinking was along the lines of reducing your working hours without cutting back on your take home income between the ages of 55 and your eventual retirement.
The concept allows a person to reduce their working hours whilst at the same time accessing a small amount of their Superannuation entitlements to help offset the loss of income. The theory being that we are all facing full retirement at some stage and gently easing ourselves out of the workforce could be considered beneficial.
The second and more common use of a Transition to Retirement pension strategy assists clients to make additional superannuation contributions. You probably already know that the Maximum Deductible Contribution limits for superannuation contributions for those over age 50 is $35,000 including your employers Superannuation contributions in each financial year.
It is reasonably obvious that your retirement benefit will be increased where you make higher superannuation contributions. But not everyone can afford the additional cash flow drain of making higher superannuation contributions. Mortgage and children’s education etc. all have an impact on an individual’s ability to fund additional superannuation contributions.
A Transition to Retirement strategy allows a client to boost superannuation contributions without impacting on the amount of “take home” salary that an individual earns.
Here is an example of how this works…
For the sake of the example, we need to assume a few things;
1. A salary of between $37,000 and $80,000 per annum
2. Which means your top marginal tax rate is 32.5% plus Medicare
3. You are aged over 55 (The minimum age for when a transition to retirement pension can start)
To best illustrate how the Transition to Retirement Pension strategy works, I would like to make it as simple as possible by dealing with a single dollar as an example.
Imagine I come to you and advise you to put an additional $1.00 into your Superannuation. Because of a range of other factors in your life, you feel that you can’t afford to do this.
Let me show you how you can afford this easily.
Here’s how it works.
To have a single dollar, (and based on an income between the ranges already noted above) you actually need to earn $1.50 before tax. Based on the 32.50% (+ Medicare) tax bracket, you will pay around 1/3rd of the $1.50 in tax. The tax man gets 0.50c and you get to take home the $1.00
Using your existing Superannuation funds, you can establish a Pension facility and draw income from it. This is despite you continuing to work and generate a decent taxable income. This is quite legal.
I have recommended that you put $1.00 into your Superannuation arrangements. Using your pre-tax income, you put $1.50 into the Superannuation arrangements resulting in missing $1.00 from your take home income.
Using the newly created Pension facility, you draw out $1.00 to offset the $1.00 that you are now missing from your pay packet.
Remember that the superannuation contribution of $1.50 is taxed at 15% (I know that this is higher for those lucky enough to earn very high incomes). The tax on this is 22.5 cents. This means that your $1.50 contribution to Superannuation has been reduced to $1.275. A profit of 27.5 cents.
The outcome is that you;
• invested a $1.50 pre-tax from your income,
• lost $1.00 in take home salary,
• received a Pension income of $1.00 to offset the lost dollar and
• in the process made a 27.50% profit on your contribution which has boosted your Superannuation.
Over a decent period of time, this adds up to be a pretty penny.
If you would like to receive a comprehensive detailed illustration of the potential benefits of a Transition to Retirement Pension strategy, please visit www.transition-to-retirement.com.au. You will need to enter a few specific pieces of information in relation to your age, income and superannuation balance.
The report prepared is detailed and shows you exactly what the potential benefits are. The most important piece of information that is produced is the calculation to maximise benefits based on your income and superannuation position.
And best of all, its free!