People who are considering reducing their work hours in the lead-up to retirement, but concerned about not having enough disposable income as a result, can, through a superannuation transition to retirement (TTR) strategy, access part of their super to top up their income.
At the same time, a superannuation TTR strategy brings with it the opportunity to take advantage of unique and significant taxation benefits available only to members of super funds.
When can I start to access my super?
Many people assume that the only time they can access their super is once they fully retire. While this was the case when compulsory superannuation was first introduced in 1992, this has changed.
It changed in 2005 to reflect new approaches and attitudes to work – and retirement – with more people preferring to ‘ease’ into retirement via reduced work hours, consultancy work or other arrangements as opposed to the traditional approach of working full-time for one’s entire career before going ‘full-time’ into retirement.
The determinant of when you can begin to access your super is not necessarily whether you are working full-time, part-time or occasionally. The determinant is your age – specifically your ‘preservation age’, as it is called in superannuation. Once you reach your preservation age you can begin to access your super.
For people born before 1 July 1960, their preservation age is 55 years. For those born between 1 July 1960 and 30 June 1961 it is 56 years. For those born between 1 July 1961 and 30 June 1962 it is 57 years. For those born between 1 July 1962 and 30 June 1963 it is 58 years. For those born between 1 July 1963 and 30 June 1964 it is 59 years and for those born on or after 1 July 1964 it is 60 years.
There are also limited exceptional circumstances which allow people to access their super before their preservation age. These circumstances are mainly related to specific medical conditions or severe financial hardship.
If I can access my super, why don’t I just take it all?
Once you reach your preservation age, you can begin to access part of your super savings via a TTR strategy.
And when you turn 65, regardless of your work status, you have full access to your super savings.
For some people, the option of accessing some of their super savings may be attractive as they may choose to use funds to pay off debts such as mortgages.
The downside of such an approach is that your hard-earned superannuation account balance is meant to help fund the type of lifestyle you have been planning to live in retirement.
There may also be tax and loss of insurance consequences attached to such an approach compared to maintaining your super account and drawing an income via a TTR strategy. It is well worth discussing this issue in detail with your financial planner and super fund.
It is also worth considering the well documented risk that comes with sudden access to significant amounts of money; people may perhaps spend more of their financial savings than they had planned and find themselves short of funds a few years later.
TTR pension accounts
Assuming that you have reached your preservation age and would like to access part of your super, setting up a TTR super pension account is easily and quickly done. Your super fund will set up your TTR pension account into which you transfer some, but typically not all, of your super account balance.
You will often need to leave at least a small balance in your super account so that it remains open to receive ongoing employer super contributions and any voluntary contributions you choose to make.
It is well worth discussing with your financial planner and super fund how much of your super account balance should be transferred to your TTR pension account.
In terms of the investment earnings generated on your super savings, it is important to note that the funds you have in both your super account and your TTR pension account will continue to compound, and at the same rate.
Taxation advantages of TTR pension accounts
Successive Australian governments have committed to a range of tax advantages which are unique to superannuation. They have done so to encourage people to save for their future via contributing to their super. These tax advantages are part of the benefit people enjoy – the quid pro quo, if you like – in return for their super contributions being locked away until they reach their preservation age.
When you set up a TTR pension account and continue to work (full-time or part-time), you can also continue to enjoy the unique super tax benefits that come from making voluntary contributions (e.g. by salary sacrificing) from your salary to your super.
TTR pension account members who are still working (full-time or part-time) can make concessional contributions (e.g. Superannuation Guarantee paid by an employer and salary sacrifice contributions) of up to $25,000 per financial year into their super. These contributions are taxed at the low rate of 15 per cent as compared to your marginal tax rate, which typically will be much higher.
The withdrawals of money that you make from your TTR pension account are completely tax free for those aged 60 and over. If you are aged 55-59, you may pay tax on the TTR income, but you will receive a tax offset equal to 15 per cent of the taxable portion of the income.
For those super fund members wishing to do more reading to determine whether a TTR pension account strategy is the right move now, or in the next few years, the Australian Securities and Investment Commission (ASIC) MoneySmart website contains excellent independent information on this subject, including case studies on topics such as ‘Using a TTR pension to reduce work hours’ and ‘Using a TTR income stream to maintain work hours and save tax’.