If you’re over 55 and working, consider the Transition to Retirement option.
It could help you build savings faster by using tax savings to help you save more into your super.
Build up your super before you stop working
The AustralianSuper Pension may enable you to build up your retirement savings while you use your super as regular income.
The Transition to Retirement option may help you to:
- increase your super savings, or
- cut back your working hours while you keep the same income.
The key to this savings strategy is maintaining your take-home pay and minimising the income tax you pay by sacrificing some of your before-tax salary and contributing this to super. It’s a three step process:
- set up higher salary sacrifice amounts from your before tax salary – this way you only pay 15% concessional tax on these amounts.
- transfer your super balance to a pension account with a Transition to Retirement option.
- draw regular payments from your pension account to supplement your reduced take home pay due to the higher salary sacrifice payments to your super.
The end outcome of this is the same take home pay, yet higher savings to your super due to the additional salary sacrifice contributions at a lower 15% tax rate.
The extra bonus to this is any earnings on your pension account are tax-free (unlike your super account where the earnings are still subject to 15% tax).
If you’re planning to cut back your working hours drawing a pension could leave you with the same take-home pay, even though you’re working less.
Case study
Peter has just turned 55 and is keen to boost his super through salary sacrifice. He works as a greenkeeper and is looking forward to spending more recreation time on the golf course when he retires. After speaking with his financial adviser, Peter was able to implement a strategy that saved him $3,287.79 per year in tax. That’s more than $3,000 per year that Peter can use to increase his retirement savings.
| EXAMPLE (for illustrative purposes only) |
Before Transition to Retirement Option |
After Transition to Retirement Option |
| Normal income |
$60,000.00 |
$60,000.00 |
| Salary sacrifice contribution |
$0.00 |
$25,000.00 |
| Income from existing super savings (rolled into a pension account) |
$0.00 |
$8,962.00 |
| Taxable income |
$60,000.00 |
$43,962 |
| Tax |
|
|
| Income tax taken from pay |
$11,550.00 |
$6,738.60 |
| Medicare levy |
$900.00 |
$659.43 |
| Low income tax offest |
$300.00 |
$941.52 |
| Mature age worker tax offset |
$150.00 |
$150.00 |
| Total tax |
$12,000.00 |
$6,306.51 |
| Pension tax offset |
|
$1,344.30 |
| Take-home pay |
$48,000 |
$38,999.79 |
| Impact on superannuation |
|
|
| Employment income |
$60,000.00 |
$60,000.00 |
| Salary sacrifice contribution |
$0.00.00 |
$25,000.00 |
| 9% SG contribution |
$5,400.00 |
$5,400.00 |
| Less 15% contributions tax |
$810.00 |
$4,560.00 |
| Net super contribution |
$4,590.00 |
$25,840.00 |
| Pension income |
|
$8,962.00 |
| Overall addition to super |
$4,590.00 |
$16,878.00 |
Impact to tax
|
|
|
| Income tax |
$12,000.00 |
$6,306.51 |
| Pension tax offset |
|
$1,344.30 |
| Contributions tax |
$810.00 |
$4,560.00 |
Calculations are based on 2010/11 tax rates and include the 1.5% Medicare levy, the low income tax offset, the mature age worker tax offset and, if applicable, the pension tax offset. Assumption is that 100% of Peter’s pension balance is taxable. This is an example only and should not be taken as financial advice in any way. You need to assess your own situation and a financial adviser would be able to help you and provide calculations that meet your circumstances.
Cut back your work hours, not your income
Alternatively, if you’re not ready for retirement, but would like to work part time, you can use this strategy to supplement your income to maintain your same level of income.
Depending on your circumstances, you could even end up with the same take home pay as when you were working full time, by receiving the difference as a payment from your pension.