FS360 Podcast - Episode 44
Transition to Retirement
If you’re not quite at retirement age but are thinking of that next phase of your life, a transition to retirement (TTR) plan at Mulcahy & Co could be a way to set yourself up for the future.
Mulcahy & Co financial planner Tamara Vawdrey says her team generally look to implement TTR plans at age 60, however it could be done at the preservation age of 57.
“It’s an income stream (for) a person that has reached their preservation age, which is 57 now, they get limited access to their superannuation while they’re still working,” she said on episode 44 of the FS360 podcast. ”You can start a TTR income stream by transferring some, most of the time the majority of your super balance, into an income stream pension.
”You still need to retain a balance in your accumulation account because … you’re still getting your employer contributions going in there. ”You can withdraw between 2-10% of your pension balance each year.”
Vawdrey touched on the numerous benefits of a TTR plan, including being able to work less while still earning the same income thanks to your super fund topping up your active income. TTR plans could help pay outstanding debts you have before retirement, such as a home loan.
People 57 years of age and older are able to withdraw up to 10% of their pension account per year, meaning if you have, for example, a $100,000 home loan outstanding that you want to pay off before retirement and $200,000 in your pension fund, you could take out $20,000 per year to pay off your home loan.
Between the ages of 57-59, any money taken from your super fund becomes part of your taxable income, however this isn’t the case once you turn 60. Vawdrey explained the tax benefits to implementing a TTR plan. If, for example, you take out $20,000 and use those funds to make a re-contribution to your super fund, this is called a re-contribution strategy. You would earn a tax deduction on that lump sum, paying at the super tax rate, 15%, instead of the marginal tax rate.
There is a contribution cap, however, which is $27,500, which does include your employer contributions.
Salary sacrificing is another tax benefit, where you could use your pre-tax income and put it into your super fund, to save paying tax on that amount. For example, if you salary sacrifice $10,000, that comes off your income, prior to charging tax on it. So, if you earn $100,000 per year and salary sacrifice $10,000, you’ll only pay tax at $90,000.
In good news for employees, employers’ mandatory superannuation contribution are increasing. This figure is set to rise 0.5% each year until it hits 12%.
For more information on this topic please contact one of our professionals.
Transition to Retirement case study.
Recently, clients engaged us at Mulcahy & Co because they are in their mid-late 50’s, with a mortgage, and want to retire without one.
Having worked hard their entire lives, their plan is to reduce their work hours at age 60, and permanently retire with an eye to a life on the caravanning circuit at 65. Based on their calculations, they couldn’t see how this could be achieved with the pesky mortgage in the background. Enter: TTR
To find out more about TTR, you can
read the full article here. You can also read the case study below.
Case Study
Gary is 60 and earns $75,000 a year and he has $250,000 in his super. He wants to cut back from 35 hours a week down to 25 hours, which will reduce his salary from $75,000 to $53,500. By using a TTR strategy and withdrawing $13,885, he can maintain his after-tax income, despite reducing his work hours.
| Before ($) | After ($) | |
|---|---|---|
| Salary | $75,000 | $53,500 |
| TtR allocated pension | - | $13,885 |
| Gross assessable income | $75,000 | $53,500 |
| Income tax | ($14,842) | ($7,227) |
| Take Home Pay | $60,158 | $60,158 |
But it does come at a price – his super will dwindle more quickly as he continues to draw down on his pension payments and there is a smaller amount going into his super from his employer because employer contributions are based on salary.
Other benefits
- Recontribution strategy – by setting up a TTR between the age of 60 and 65 and withdrawing the maximum pension payment of 10% you can recontribution this pension payment back into your super account and claim a tax deduction in your own name
- Once you hit the age of 60 and if you fully retire then you can have full access to your super balance, there is no maximum pension payment
Episode 44
Tamara Vawdrey from our Financial Planning division joins again - this time to talk about 'Transition to Retirement' or TTR with host Gavin Nash. A great episode specifically if you are in your late 50s or above in age. Lots is changing in this space with new laws and rules so this episode is of great value.
Available on Google and Apple Podcasts, Spotify and also our website along with an accompanying article to help explain the details.
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