Transitioning into retirement – When the tax man finally gives back

This whole transitioning into retirement thing doesn’t really have a lot to do with retirement. In fact once you are over 55 retirement is almost irrelevant in relation to this strategy to boost your super. It is all about working with the assets you have to do the things you have been dreaming to do over all those years. Years where you have been busy doing other things like dropping the kids off to sport on Saturday’s, school recitals, and walking the family dog that was the kids responsibility, which has somehow fallen on you!

The bottom line is that the tax man starts to loosen his grip on your hard earned and allows people with a super fund to save some tax and get some money out of super by converting to a pension. If you are over 60 it is always a good idea and for those between 55 and 60 it will often be worthwhile, particularly for those with a lower income. Who knew the tax man could be so generous! Bad news for those under 55 is it’s not an option for them.

Firstly, think of super funds as a pool of money that you put money into and pensions as a pool of money that you take money out of. We often like to think of a water tank that is off the ground… you have to work hard to deposit into the tank where it builds and builds and one day you can just turn the tap on and away you go, your new income source commences.

A big difference between your funds in super compared to moving them to a pension account is the dirty word called tax. Super funds pay tax at 15 percent and this is neatly packaged up and sent off to the Tax Office every year. Pensions however pay no tax, a reasonable saving for many with larger amounts in super. Given a choice, most of us would like to pay less tax, hence the popularity of the Transition to Retirement strategy.

For example, if your super balance is $500,000 and you earn a return of 10% you will have to pay $7,500 in tax. If you move the same funds into a pension account your tax will be nil. That sort of money is much better spent on a cruise than tax!

Having given away all the tax revenue the government has however imposed a few rules. Firstly you must take a minimum of four percent of your pension each year. You don’t have to spend it, you just have to take it out of the pension fund. However, a trip to the travel agent to book a European adventure usually takes care of the minimum pension requirements. Be aware that if you are still working there is also a limit of 10 percent that can be drawn in any given year from the pension. If you meet a certain condition of release such as retirement and over 55 you are eligible to withdraw as much as you like.

If you are still working and have commenced a pension, you may consider salary sacrificing some of your earned income. This will increase your benefits for retirement, reduce your income tax, and the income received from your new pension can offset the income put into salary sacrificing. This round-robin of money reduces your tax and increases the money in your pocket with the government giving you the big stamp of approval.

Transitioning into retirement has considerable advantages for you to reduce your tax, build your wealth to fund your retirement, and use the additional funds for your hobbies, travel, and other recreational activities. This can be a little confusing so you may wish to speak to a financial expert with appropriate qualifications.

My final tips:

• Consider a transition to retirement pension if you are over 55
• If you do not need the income, salary sacrifice some of your income to reduce your income tax
• As your super builds up, move it over to a pension account.
• Speak to a Certified Financial Planner to ensure you maximise the benefits

The advice in this article is general information only. You should seek professional advice on how this might apply in your circumstances. Inappropriate access to superannuation can bring about significant penalties.