A transition to retirement strategy could help improve super savings. It allows members of a regulated superannuation fund who have reached preservation age (currently age 55) to access their superannuation benefits without needing to retire. This gives workers the option of remaining in the workforce, rather than being forced to retire early simply to get access to their superannuation.
This limited condition of release (also referred to as a “transition to retirement pension” or “pre-retirement pension”) allows a person who has attained preservation age to access superannuation benefits through the existing range of non-commutable income streams. Importantly, eligibility for this condition of release is not subject to a work test (ie part-time and full-time employees qualify).
The minimum pension standards can be used to provide the transition to retirement income stream for a person who has reached preservation age. However, transition to retirement income streams have a maximum annual payment limit of 10% of the account balance at the start of each financial year.
The category of “transition to retirement income stream” or “non-commutable allocated pension or annuity” cannot be cashed or commuted to a lump sum while the person is still working, unless they have satisfied a condition of release with a “nil” cashing restriction (eg they have retired permanently from the workforce or reached the age of 65).
Note that it is not compulsory for superannuation funds to offer their members these non-commutable income streams. Furthermore, the fund’s trust deed must allow benefits to be accessed when a member reaches preservation age, without needing to retire, and must allow the payment of a non-commutable complying or allocated pension.
Also, it will not be possible to receive a pension (including a transition to retirement pension) from a MySuper product from 1 July 2013. As such, a MySuper member will need to switch to a separate choice product before commencing a transition to retirement pension.
Salary Sacrificing Strategies
Transition to retirement pensions has brought to light various tax strategies where taxpayers over the preservation age can draw down their superannuation via a transition to retirement pension while salary sacrificing employment income back into retirement savings.
Instead of being taxed as employment income at the taxpayer’s marginal rate, the salary sacrificed superannuation contributions are only taxed at the rate of 15% on entry into the superannuation fund. However, the amount available for salary sacrificing is effectively restricted by the annual concessional contributions cap.
Note that the effective contributions tax has been doubled from 15% to 30% for certain concessional contributions for income earners who are above a $300,000 income threshold. Therefore, individuals who exceed the $300,000 income threshold should review their superannuation contributions and salary sacrificing arrangements to take into account any impact of the additional 15% tax.
A pension paid to a person aged 60 and over is tax free. A pension paid to individuals under the age of 60 and above preservation age is included in their assessable income, but a 15% tax offset applies to the taxable component of the pension.
Decide on Your Next Step
It is prudent to seek independent financial advice to help you decide if a transition to retirement strategy is right for you. Please contact our office for further information.