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24 January, 2022
Transition to retirement strategy
First Financial Team
Did you know that you can access some of your super before you actually retire? The Transition to Retirement (TtR) strategy is designed to provide you with the benefit of a partial pension payment that supplements a reduction in working hours.
This can be a great opportunity to prepare you for your retirement lifestyle, but it also offers you the chance to boost your superannuation balance while even reducing your tax obligations.
The TtR strategy can be complex, so we always recommend discussing your options with a professional financial adviser, but today we take a look at some of the key features.
Different pension types
There are two different types of account-based pensions. These are either retirement phase pensions or TtR pensions. The key difference between them is the tax mechanism they attract on their earnings.
A retirement phase pension can only be commenced once you have met your superannuation’s full condition of release. All earnings from the assets that support this pension are untaxed.
In comparison, you can start a TtR pension once you reach your preservation age. The ATO determines your preservation age based on the year you were born – between 55 and 60. A TtR pension is taxed up to 15% on its asset earnings, including capital gains.
Tax implications of the TtR
While you can not avoid the 15% tax on the earnings within your TtR, the tax treatment of your pension payments is determined by your age.
If you are 60 or over, your income payment from your TtR will be tax free, when your super fund is recognised as a taxed scheme. But if you are under 60 years of age, the taxable portion of your income would incur your marginal tax rate – minus a 15% tax offset.
This is where it can get complicated and why we recommend talking to an adviser before starting a TtR.
TtR partnered with salary sacrifice
For some people, starting a TtR is the ideal way to begin winding down. You can drop some hours at work and use the supplementary income to help maintain the same lifestyle.
But if you don’t want to actually pull back from work just yet, the TtR can still offer you a unique opportunity. You can boost your super balance and reduce the amount of tax you pay if you partner TtR with a salary sacrifice.
Through a salary sacrifice scheme, you can make extra superannuation contributions. You can save tax here because these contributions attract only 15% tax… which is most likely going to be lower than your standard marginal tax rate.
You can also save on income tax, because depending on your age your TtR income is either tax-free or taxed at your marginal rate minus a 15% offset as noted above.
We are here to help
The TtR strategy is undoubtedly difficult to navigate on your own… but depending on your personal circumstances it could be highly advantageous. This is where we can help.
Our team of financial advisers understand that everyone’s situation is different.
We take the time to get to know you and can offer you advice that truly suits your individual needs. If you’d like to find out more about our retirement planning services, please contact us today.
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