Transition To Retirement

By FutureNestEgg | September 15, 2009

In my previous post, I wrote about preservation age and how we cannot access our super funds until we reach this age. Once you reach the preservation age, assume that you still want to continue working – either for financial reasons or because you love the work you are doing and hence would like to continue with your work.

For one of the above mentioned reasons, you decide to work part time. Part time work means reduced salary. Since you will be working part time and have not yet retired, you will not be able to fully access your super fund. But you need to have some way of compensating for the loss in your income.

This is where the Transition To Retirement kicks in. It makes the transition from work to retirement easy – gives you the flexibility to move into retirement, gradually – i.e. replace full time with part time and then retirement.

Once you reach your preservation age, if you would like to continue with your work (either part time or full time) then you can get access to some regular pension payments from your super fund. This is especially applicable to part time work because it is only for part time work that there will be a loss of income and so some regular pension payments is required to compensate the loss in income.

Features Of Transition To Retirement

A part of your super fund amount is moved into a non-commutable income stream – meaning no lumpsum withdrawals.

You will receive regular payments.

The minimum total amount you can get in a year is 4% of your total super fund amount and the maximum you can receive is 10%.

Also note that not all super funds have the ‘transition to retirement’ option. So check with your super fund if they have this option.

To condense the main feature in a few words:

Allows you to access super funds without retiring

Tax Advantages

There are some good tax advantages with transition to retirement. The tax advantage is due to salary sacrifice and tax offset.

Let me explain:

You have two options: One is no salary sacrifice and no access to to super fund. You live on the total salary you get.

The second option is you salary sacrifice and compensate the loss of income (due to salary sacrifice) through regular payments from transition to retirement.

The second option is tax effective and will also result in an increased balance in your super fund. The regular payment you get from your super has a tax offset of 15%. Plus by salary sacrificing, you are bringing your gross salary into a lower tax bracket.

I have illustrated these tax benefits below with an example (the example has been copied from CEOForum.com.au website – So full credit goes to them)…

In the example, Colin’s gross salary is $100,000. Under ‘No Strategy’ he does not use Transition To Retirement. Under ‘Strategy’ he salary sacrifices $63,675 and is left with a salary of $36,325. He supplements the salary sacrifice by drawing down $50,000 through Transition To Retirement. Note that he receives a 15% tax offset under ‘Strategy’. Also note that his salary sacrifice amount reduces to $54,123 because of 15% contributions tax. So at the end of day his super balance increases by $4123.

Transition To Retirement example