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Insights Into The Transition To Retirement Strategy (Part 1/3)

This year is the 10 year anniversary of the Transition to Retirement Strategy. This fact combined with the number of questions we still get from would be clients about how the strategy works, I thought I would put together this 3 part series on the subject. So let’s start with some basics.

Getting access to funds in your superannuation when approaching retirement used to be an ‘all or nothing’ affair. You either had to keep working, in which case your superannuation would be unavailable to you, or you had to formally retire. This meant that many people were, in a sense, forced into early retirement and that others had to continue working until the official retirement age in order to maximise their retirement income.

Fortunately this rather inflexible system has been replaced with the so-called ‘Transition to Retirement’ measures that came into force from 1 July 2005. In a nutshell, Transition to Retirement allows people who are still working, and who meet the eligibility criteria, to derive income from their superannuation funds.

This arrangement opens up some interesting investment and income maximisation options for mature age workers and also gives them the possibility of easing into retirement while continuing in their careers. It can, as will be explained, also be a very efficient way to boost eventual retirement income.

You would do well to investigate whether making use of Transition to Retirement can benefit you in your circumstances as it could possibly make a real difference in your financial position and lifestyle. Seek professional help when considering this strategy. Sometimes it is a no brainer but other times it isn’t.

Access to Superannuation

Superannuation is money that you put aside during your working life to use in your retirement. You can access your super when you:

1. reach your preservation age and retire
2. reach your preservation age and have begun a transition to retirement income stream, or
3. if you are 65 years old (even if you have not retired)

Withdrawal options

When accessing your super you can receive it as an income stream, as a super lump sum, or as a combination of both. With a superannuation income stream (pension) you receive an income stream as a series of regular payments from your super fund (paid at least annually).

You may also be able to withdraw some or your entire super in a single payment; called a 'lump sum' payment. There are also other special circumstances where you can access your super, including severe financial hardship, terminal medical condition, temporary or permanent incapacity and temporary residents leaving Australia permanently.

Once you have reached your preservation age (refer below), if you are still working, you can begin a transition to retirement income stream; allowing you to receive regular payments (as an income stream) from your super while you continue working. Each financial year you can access up to 10% of the funds that are in your pension account.

What is ‘Transition to Retirement’?

The Transition to Retirement measures allow people nearing retirement (see below for specific eligibility criteria) to access their accumulated superannuation in the form of a non-commutable income stream. This simply means that you cannot withdraw a cash lump sum from your superannuation fund under these measures and that a maximum drawing level applies.

Making use of Transition to Retirement by drawing an income stream from your superannuation benefits does not mean you permanently waive the right to withdraw a cash lump sum from your fund. ‘Normal’ rules governing withdrawals (including the ability to take out a lump sum) will come back into play if you:

1. Retire permanently between preservation age and age 60
2. Retire permanently or cease your current employment after age 60 (even if you intend to seek other work)
3. Reach the age of 65
4. Become permanently incapacitated or meet another superannuation condition of release

Obviously discuss your options with a financial adviser experienced in this area before making a final decision on setting up a non-commutable income stream.

Who is eligible and what are the most important rules?

Your preservation age depends on your date of birth and can be determined by consulting the table below:

Date of Birth Preservation Age
Before 1 July 1960 55
1 July 1960 – 30 July 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
After 30 June 1964 60

Once you reach your ‘preservation age’ you can, under the Transition to Retirement measures, access some of your superannuation benefits without having to retire completely from the workforce. If you are indeed eligible to make use of the Transition to Retirement arrangements you will have to keep the following rules in mind:

1. You cannot withdraw more than 10% of the total fund value per year
2. You have to withdraw a minimum of 4% per year
3. Transition to Retirement allows the provision of regular income streams but not the withdrawal of lump sums.

In the next article we will look at some benefits of the strategy and a range of frequently asked questions (and answers).

View More Articles By Frank Paul

Frank Paul is Chief Operating Officer & Head of Advice Services with Spring Financial Group. Frank has over 20 years' experience in financial planning and investment advisory.

Frank has extensive experience in private client advising and the management of financial services operations. Frank is actively involved in the recruitment and management of advisory personnel and heads the advisory panel. He holds a Master of Commerce (Financial Planning) and a Dip. Financial Planning and has authored literally dozens of financial education publications.



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