2. Boost your super while saving on 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 your 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 #1: reduced work hours

Ben is 60 years old and currently earns $100,000 a year before tax. He decides to ease into retirement by reducing his work hours to three days a week. This means his income will drop to $60,000 a year before tax.

He decides to transfer $200,000 from his super into a transition to retirement income stream. He then withdraws $20,000 a year, tax-free until he retires. The amount in the transition to retirement income stream will replace some of his lost salary, until he decides to retire from the age of 65.

Case study #2: saving tax

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 a transition to retirement strategy

To be eligible for a transition to retirement strategy, you must have reached your preservation age. From 1 July 2024, the preservation age is 60.

Additionally, the Australian Taxation Office sets certain conditions, such as:

• You must withdraw between 4% and 10% of your super account balance each year and at least one withdrawal must be made

• Generally, you can't access your super as a lump sum payment while still working. It must be taken as regular payments

• The payments received from your transition to retirement income stream may contribute to your taxable income if you are under age 60

• If you or your partner currently receive social security payments, a transition to retirement may affect your entitlements

• 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.

Tax on a transition to retirement strategy

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%.
 

How to start a transition to retirement strategy

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.

Generally, you’ll need to follow these steps:

1. Contact your super fund and let them know you want to start a transition to retirement income stream
2. Complete the necessary application forms and provide the required documentation, including proof of identify and preservation age
3. Clarify the frequency and amount of income stream payments you wish to receive within the permitted range.