Under new transition to retirement rules, if you have reached your preservation age, you may now be able to reduce your working hours without reducing your income. You can do this by topping up your part-time income with a regular ‘income stream’ from your super savings. Previously, you could only access your super once you turned 65 or retired.
Under these rules, you can only access your super benefits as a ‘non-commutable’ income stream. A non-commutable income stream is one that cannot be converted into a lump sum. This generally means you cannot take your benefits as a lump sum cash payment while you are still working. You must take your super benefits as regular payments.
Employers still need to make compulsory super guarantee contributions for all their eligible employees, including people on transition to retirement.
When considering the tax aspects of retirement, transition to retirement or superannuation income streams, we recommend you seek financial advice to find out what is best for you.
Retirement income streams are a popular investment choice for retirees. Retirement income streams are simply investments that give you regular income payments through your retirement. This helps you manage your income and spending.
Accessing your super benefits
Under the transition to retirement rules you can only access your super benefits as a ‘non-commutable’ income stream. This generally means you cannot take your benefits as a lump sum cash payment while you are still working. You must take your super benefits as regular payments.
We recommend you:
> ask your super fund whether they offer non-commutable income streams
> seek financial advice to find out what is best for you.
A non-commutable income stream is one that cannot be converted into a lump sum.
Funds offering income streams
It is not compulsory for super funds to offer you a non-commutable income stream. If your fund doesn’t offer an income stream which lets you take up the transition to retirement option, you may be able to choose a new super fund.
Understanding the preservation age
Your preservation age is generally the age you are allowed to access your super benefits when you stop working.
The table below shows your preservation age. Once you reach your preservation age, you can access your super benefits without retiring completely from the workforce.
Table: Your preservation age depends on your date of birth
Tax on transition to retirement income streams
Transition to retirement income streams are taxed in the same way as other income streams.
> if you’ve reached your preservation age and are less than 60 years old, the taxable part of your income stream will be taxed at your marginal tax rate.
> If your income stream is paid from a taxed source, you will also receive a tax offset equal to 15% of the taxable part of the income stream, and
> once you turn 60, your super income from a taxed source will be tax-free.
Limits on the transition to retirement measure
There is no specific limit on the amount of superannuation benefits that may be drawn down under the transition to retirement measure other than the requirement that no more than 10% of the account balance, as at the start of the financial year, may be paid each year.
Members should discuss this issue with their superannuation fund as funds will have their own rules.
Beware the traps and pitfalls
The key traps and pitfalls are:
- Potential impact on future benefits This is particularly important if a defined pension is involved, where the benefits are related to age and length of service.
- Potential impact on insurance arrangements Existing life insurance cover may cease or reduce. Also, if new contribution arrangements are entered into, then sums insured may reduce, and medical examinations may be required which might lead to new conditions being imposed.
- Timing Consider the overall gain of withdrawing benefits between 55 and 60 — given that the Federal Budget proposals are likely to remove tax on benefits after age 60.
- Proposed limits to concessionally taxed superannuation contributions. Consider the tax-effectiveness of any associated re-contribution strategy (see below) in light of proposed new tax-effective contribution limits.
- Strategies involving transition to retirement pensions
- A well-publicised strategy (“pension with salary sacrifice”) involves setting up a transition to retirement pension, with salary sacrifice of additional amounts to super.
A strategy can be designed to ensure the pensioner’s superannuation savings continue to grow — despite the fact that they are receiving a pension, and the net of tax income level is maintained through a combination of salary and pension income.
Tax implications – under current law
If the person’s aggregate benefits have been within RBL, then:
- the pension is generally subject to a 15% tax rebate; and
- the salary sacrificed contributions are not taxed in the individual’s hands — but are subject to contributions tax in the fund.
There are tax savings if the person has room within their RBL. The tax savings arise because by reducing their salary, a person pays less tax.
Also, aggregate superannuation savings may rise as a result of the favourably taxed savings environment in the fund. The strategy can also provide favourable results for a person who is likely to exceed RBL — mainly as a result of time value of money savings as a result of deferring tax.