Insights Into The Transition To Retirement Strategy (Part 3/3)
We are now ready to look at Transition to Retirement in action.
The purpose of the hypothetical case studies below is to demonstrate how the benefits mentioned earlier can be achieved through making use of Transition to Retirement. It should be noted that some of the applications of the measures can be quite complex, making it impossible to cover all the likely permutations in this article. The examples given below should therefore be seen as general descriptions of the most common ways in which people can benefit from Transition to Retirement.
a) Flexible working option
Sarah is 59 and works 30 hours per week, earning about $60,000 per annum. She is contemplating retirement but doesn’t feel ready to stop working completely. She decides to reduce her working hours to 10 per week. This means that her annual salary-based income will drop to $20,000. She does some number crunching and decides that she will need another $25,000 p.a. to maintain her current lifestyle. She proceeds to use $450,000 from her superannuation fund to create a non-commutable income stream to provide the $25,000 p.a. that she needs to bridge the gap between her earnings and her income requirements.
b) Extra income
Peter is 61 and is committed to working full time until he reaches 65. He decides however, to make use of the Transition to Retirement arrangements, using his super balance of $600,000 to fund an income stream of $35,000 per year. Since he is working full time, this money is not needed for day to day expenses and can be used for special projects, namely the purchase of his future home that he wants to retire in. Previously Peter would have had to sell his current home first in order to raise the necessary funds but now the extra income can be used for a mortgage on a retirement property. When he retires, the loan can be paid off by using the capital locked up in his existing home.
c) Maximising retirement income
Philip is 60 and works fulltime. He intends to keep working until he reaches 65. He earns $120,000 per year and his superannuation fund contains $500,000. He decides to draw the minimum annual pension and then to ‘salary sacrifice’ some of his income into his fund. On top of his legislated employer superannuation contributions of $11,400, Philip salary sacrifices an additional $23,600 into his super fund to take the total concessional contributions (Pre-tax) up to $35,000 pa.
The following table illustrates the overall impact of this strategy on his cash flow and superannuation balance:
Cash Flow (based on rates in place from 1/7/2015 to 30/6/2016)
|No TTR||With TTR|
|Superannuation Guarantee (9.5%)||$11,400||$11,400*|
|Income Tax (Inc. Medicare Levy)||$34,747||$25,543|
|Pension Payments (tax free)||$0||$20,000|
|Net increase in cash flow||$5,604|
*When salary sacrificing, you should make sure to discuss with your employer and maintain your current superannuation guarantee.
|No TTR||With TTR|
|SG Contributions (less 15% tax)||$9,690||$9,690|
|Salary Sacrifice (less 15% tax)||$0||$20,060|
|Return (7% assumed) net of tax||$29,750 (15% tax)||$35,000 (Nil tax)|
|Net increase in superannuation balance||$5,310|
|No TTR||With TTR|
|Income Tax Paid (plus Medicare)||$34,747||$25,543|
|Tax on Super Contributions||$1,710||$5,250|
|Tax on Pension Payments||NA||$0|
|Tax on Returns in the Fund||$5,250||$0|
It should be clear from the above examples that the Transition to Retirement measures can benefit people in a wide variety of ways. There is often, however, a wide gulf between general principles and individual circumstances. You should therefore find a solution that will work best for you. One way of doing this would be to ensure that you get the best possible advice by consulting a financial adviser.
In the process of discussing this strategy with an adviser, you will think through your financial goals and how this strategy may or may not fit in with those goals. The following will be analysed:
Your current tax rate: The rate at which you pay tax will be a decisive factor in determining whether you can benefit from salary sacrifice or whether you should perhaps investigate alternative investment avenues.
Your current super arrangements: It will have to be ascertained whether your current fund is compatible with Transition to Retirement. In the case of SMSFs certain changes may have to be made to the trust deeds. The balance in your super will also be a factor in making the decision on whether this will be an appropriate strategy for you.
Your Investment and Future Planning Profile: How old are you? When would you like to fully retire? What are your financial goals? Are you looking to scale back your working hours? Is ‘beefing up’ your super a very high priority? The answers to these questions will have a direct bearing on whether Transition to Retirement is appropriate for you and, if so, how it should be set up.
Approaching retirement can be both daunting and exhilarating. It is our wish that you will be able to use at least some of the information contained in this set of articles to help ease into, or should I say transition into, rather than stumble into, retirement.
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.|