2. Boosting super and saving tax
Transition to retirement can be used to grow a super balance and may help you save on tax while working full time.
When you sacrifice some of your salary into super or make your own contributions that you can claim as a personal tax deduction, each contribution is generally taxed at a rate of 15%. These amounts count towards your concessional contribution cap. This cap is $30,000 per year (for 2024-25).
If your marginal tax rate (the tax rate you pay on your income) is higher than 15%, this may be a valuable strategy to boost a super balance.
For those earning around or above $250,000 per year, some or all these contributions may be taxed at 30% (rather than 15%). However, as your personal income tax rate will be 47% (including the Medicare Levy), tax savings will still generally be available.
Case study example: transition to retirement
Samantha is 60 and earns $100,000 a year. She intends to keep working full-time for at least another five years.
As she wants to increase her retirement savings, she decides to open a transition to retirement income stream. She transfers $100,000 from her super account into a pension account.
Samantha then gives up some of her salary to make additional contributions into her super on a regular basis. This reduces her total income for the year which also reduces her income tax.
As she’s lost some of her income, she decides to withdraw 4% of her transition to retirement income balance each year.
Eligibility and conditions for transition to retirement
To be eligible for a transition to retirement, you must have reached your preservation age, which depends on your date of birth. For those born before July 1, 1960, the preservation age is 55, gradually increasing to 60 if you’re born on or after July 1, 1964.
Additionally, the Australian Taxation Office sets certain conditions, such as:
- You must withdraw between 4% and 10% of your super account balance each year
- The payments received from your transition to retirement income stream may contribute to your taxable income if you are under age 60.
Tax on a transition to retirement
Once reaching 60, pension payments are tax-free. However, at 55 to 59, the taxable portion of your pension payments are taxed at your marginal tax rate but you will receive a 15% tax offset.
Any earnings you make from having your money invested in a transition to retirement income stream, is taxed within the super environment at a maximum rate of 15%.
Considerations for transition to retirement
Before taking out a transition to retirement, it’s important to be aware of the potential drawbacks that this approach could have:
- Withdrawal restrictions:
- a minimum of 4% must be withdrawn from a transition to retirement income stream account each year. There is also a maximum withdrawal limit of 10%
- at least one withdrawal must be made each year
- generally, you can't access your super as a lump sum payment while still working. It must be taken as regular payments
- Reducing retirement savings: drawing down on super may reduce the amount of retirement savings you have left to fund your eventual retirement
- Loss of work: keep in mind the possibility of your career not going exactly to plan. A redundancy or a forced early retirement could interrupt a transition to retirement income stream, so you may need to review it with a qualified financial adviser
- Social security entitlements: if you or your partner currently receive social security payments, a transition to retirement may affect your entitlements
- Super account must remain open: a small balance must be left in a super account so you can receive your employer’s compulsory super contributions or any of your own contributions. It will also be used to pay your insurance cover if applicable
Starting a transition to retirement
Different super funds have different ways of setting up a transition to retirement so it’s worth talking to your fund if you are considering this option.
Super savings will need to be transferred into a pension account where the transition to retirement income stream will be paid from.
Note: once you’re retired, there is a limit to how much you can transfer into a pension account. This means whatever is transferred into a transition to retirement income stream could eventually count towards this cap, known as the Transfer Balance Cap—currently $1.9 million.
For those aged under 65 and still working however, there is no limit on how much can be transferred into a transition to retirement income stream account.
Generally, you’ll need to follow these steps:
- Contact your super fund and let them know you want to start a transition to retirement income stream
- Complete the necessary application forms and provide the required documentation, including proof of identify and preservation age
- Clarify the frequency and amount of income stream payments you wish to receive within the permitted range.
Seek professional advice for a transition to retirement
Transition to retirement involves complex financial considerations so it’s highly recommended you seek advice from a qualified financial adviser.
They can provide personalised advice based on your unique circumstances, ensuring your transition to retirement aligns with your financial goals.
