What is transition to retirement?
Transition to retirement is a strategy that can help you to boost your superannuation savings, reduce your tax and is also an effective strategy if you want to reduce your working hours while maintaining the same level of income. This is achieved by drawing a pension from superannuation using the ‘transition to retirement’ condition of release.
Everyone who is preservation age (currently 55) but less than 65 years of age is eligible to commence a non-commutable allocated pension.
Non-commutable allocated pensions (NCAPs) have been popular since the federal government’s transition to retirement rules were introduced in 2005. This is because NCAPs allow older Australians access to their preserved
super benefits without having to retire.
What are the benefits of this strategy?
Key benefits of an NCAP strategy may include:
the opportunity to maintain your current income and boost your retirement savings through salary sacrifice (income swap strategy), or
supplementing your income while reducing your work hours and gradually transitioning into retirement.
Can this strategy save you tax?
The benefit of an NCAP strategy comes from the differing tax rates that apply to regular income, superannuation and pensions. A lower rate of tax generally applies to pension payments received from your super, compared with the marginal tax rates on employment income. This advantage is further increased because any investment earnings in an NCAP will be tax free.
How transition to retirement income swap works
Your superannuation pension is taxed at more favourable rates than your salary. So, by replacing some of your salary with a pension, you can receive the same amount in your pocket while your superannuation savings grow each year.
Putting it all together
A transition to retirement income swap strategy can be an effective way to boost your superannuation savings. But how much your savings grow will depend on the contributions you make into super through salary sacrifice, compared with the amount you withdraw as your pension. If you take out more money than you put back in, your savings will decline in value. This will result in you having less money to fund your retirement when you stop working
We can help you strike the right balance and determine whether a transition to retirement strategy is the best way for you to maintain your income and lifestyle as you move towards retirement.