Are you aged 55 or older and own a superannuation account? Have you considered a transition to retirement strategy to boost your retirement savings?
For many, commencing a transition to retirement pension has been a very successful way to enhance superannuation savings for the future and recent changes to super rules have made the strategy even more attractive.
From 1 July 2013, those 60 years of age or older can now contribute up to $35,000 p.a. into superannuation at a concessional tax rate compared to the previous cap of $25,000 p.a. This increased cap of $35,000 will apply to those 50 and over from 1 July 2014.
If you have considered a transition to retirement pension in the past and thought that it wasn’t worth the effort, it may be time to review your situation in light of the new increased contribution cap.
What is a transition to retirement pension?
A transition to retirement pension is a type of superannuation pension that allows you to use preserved superannuation funds to generate an income. It is available to those who have reached preservation age which is currently 55.
This type of investment can provide you with a range of options as you approach retirement.
For example, you might want to:
• cut your work hours without taking a pay cut;
• look for ways to ‘turbo boost’ your super in the last few years before retirement without compromising your current lifestyle;
• reduce your debt at a faster rate; or
• simply be looking for a smarter way to arrange your finances so that less money goes to the tax-man and more goes into your pocket.
Case Study: Turbo boost your super
One of the most tax effective ways to contribute to superannuation is via salary sacrifice. This simply involves giving up some of your pre-tax salary in exchange for additional contributions into your superannuation. The benefit is that the portion of your income that you salary sacrifice (within the $25,000 or $35,000 cap depending on age as mentioned above) is not taxed at your marginal tax rate and is instead taxed at a concessional rate – for most 15%.
Depending on your circumstances this could represent a significant tax saving.
While salary sacrificing can be very attractive, increasing your salary sacrificed contributions obviously means cutting your take home pay. For many people their current commitments make this option unrealistic. However, if you are 55 or over, a transition to retirement pension could allow you to top up your pay with an income stream from your existing superannuation.
The self-employed can also take advantage of this opportunity. Instead of salary sacrificing your pay into super, you can make tax deductible contributions to super and start a transition to retirement pension to achieve the same result.
Jeremy’s Story
Jeremy (age 60) earns a salary of $65,000. He wants to maximise his superannuation balance at retirement and has heard of salary sacrifice but he doesn’t want to sacrifice his current lifestyle.
A HFI financial adviser showed Jeremy how he could have an extra $44,400 in his superannuation after just 5 years, without giving up a single dollar of his current total income.
Jeremy has $250,000 in superannuation already, and is therefore able to draw down on this amount via a transition to retirement pension. His HFI planner recommends that he salary sacrifice $28,900 into superannuation.