The smart way to ease into retirement
Nearing retirement and want to work part-time? Or are you thinking about a career change but worried about the drop in income?
If a better balance of work and lifestyle is what you want, the good news is that it may be possible under superannuation rules. Plus it can be a good way to reduce the amount of tax you are currently paying.
If you’re between the age of 55 and 65, you can potentially scale back your work hours and use your super to start a Transition to Retirement (TTR) pension – giving you an ongoing income stream, and all the flexibility and freedom that comes with additional cash flow.
How does it work?
In short, you can reduce your work hours and supplement the lost income with a TTR pension income stream that you draw down from your superannuation savings. This can potentially give you the same after-tax income as when you worked full-time.
There are two major advantages of this strategy:
- The investment earnings in a pension account are exempt from tax – compared to the 15% tax you pay inside a superannuation account.
- The income you receive from the TTR pension is generally more tax-effective than your regular income:
− If you’re between ages 55-60, any income you receive from super is taxed at your marginal tax rate. However, you receive 15% back in your income tax return each year.
− After age 60, the income you receive from super is tax-free.
In effect, commencing a TTR pension means you are changing the composition of your income, which may allow you to pay less tax overall – as demonstrated in the following case study.
Lifestyle Booster strategy
Janet, aged 58, is a retail assistant earning $50,000 p.a. ($42,203 after tax). She has a superannuation account balance of $240,000 (a 70% taxable component and 30% tax free component) and plans to fully retire from the workforce at age 65.
Her daughter has recently given birth to her first child and Janet is looking to reduce her work hours so she can help care for her grandchild when her daughter returns to work. Janet hopes to continue working three days a week, but she is concerned about meeting her living expenses if she reduces her working hours.
Janet’s financial adviser shows her that by commencing a TTR pension, she can still receive the same after-tax income as when she worked full-time – even after reducing her work hours.
To achieve this, Janet’s TTR pension supplements her reduced salary of $30,000 with a pension payment amount of $15,001 p.a. This gives Janet the same after-tax income of $42,203 p.a.
This strategy can be highly appealing to those wanting to ease into retirement. Rather than ‘downing tools’ altogether, it gives you the chance to become familiar with the shift in responsibilities and adjust gradually to retirement.
It will also be particularly helpful in situations where there is a lifestyle or personal need for part-time work, such as having to care for an elderly parent or taking care of the grandchildren. This gives you the time off to handle these issues and still work.
It is important to be aware that if you are working shorter hours and supplementing your income with money from your super, this could result in less super in retirement.
Speak to your financial adviser to ensure that a phase down strategy is appropriate for your needs and objectives before making any decision.
Source: One Path - www.onepath.com.au