transition to retirement

Funding transition to retirement

Looking to ease into retirement? 

A number of our clients have made a transition to retirement that is not a burden financially – and it has helped them prepare for some of the challenges of full retirement. (Full retirement we are told, can bring challenges psychologically unless preparation and planning are adequate.1)

Those over 55 years of age2 and having sufficient superannuation funds accumulated, have been able to draw on a transition to retirement pension to ease the financial consequences. This process is most effective when it is based on superannuation accumulation. Alternative funding for early retirement can be arranged, but will not be as tax effective as using what has been designated in the 2016 Budget papers, as the TRIS strategy. (TRIS = Transition to Retirement Income Stream.)

An income stream to supplement the reduced income from ‘partial retirement’

Transitioning to retirement suggests that the regular hours of ‘paid’ work will be cut back. In most circumstances, cutting back on hours worked will result in a reduction in the income stream relied on to meet living costs. The superannuation legislation and taxation system facilitate an income stream to offset (or even replace) the reduced income. These legislative pieces give rise to the ‘transition to retirement allocated pension’ strategy (or TRIS as referenced above). This strategy becomes accessible on attainment of the superannuation preservation age of 55 years.

[Note: this age will be later for those born after 30 June 1960.]

To benefit from these provisions the income stream must be a non-commutable income stream. Simply, this means that lump sums cannot be drawn down from the account. The most common form of this is an allocated pension. If an allocated pension is commenced, once you fully retire after age 60 – or, regardless of your work status reach age 65, the income stream becomes a normal allocated pension.

Whilst the non-commutation restriction is placed on the transition to retirement income stream, there is a requirement for the ‘retiree’ to draw annual payments of between 2 and 10 per cent of the account balance each year3.

Using a transition to retirement strategy to enhance superannuation retirement benefits

A transition to retirement pension paid from superannuation funds can be used to implement a range of strategies, including:

  • to supplement your income if you decide to work part-time (as described above);
  • pension ‘income’ is an efficient way of generating cashflow to supplement your salary or wage (you can receive a 15 per cent rebate on the pension payments: and for those over 60 years of age, the pension is completely tax-free); and
  • surplus income as a result of the pension payments, could be salary sacrificed back into superannuation accumulation. [This strategy may be less effective since the 2016-17 Federal Budget, but this will be clarified once the new Parliament is elected.]

May 2016 Budget-update

In the 2016 Budget introduced by the Federal government on 3 may 2016, a change was proposed for the taxation of income earned on allocated pension accounts invested to fund these pensions.
There are implications from other measures in the Budget, for people seeking to implement this strategy. We are of the view that the changes are not as extreme as has been portrayed by some – particularly in the traditional media.

We will monitor this situation and update this article when the 2 July 2016 election result is known and the nature and intent of the new government becomes apparent.

Can you retire early with peace of mind about your financial position?

This article reflects the wealth management Services we provide to our clients: it is most relevant to superannuation and retirement planning strategies. For information as to how you might best prepare for a financially independent retirement, a consultation with one of the experienced advisers at Continuum Financial Planners Pty Ltd will ensure that your goals are listened to, your circumstances understood and solutions provided that are personalised, professional and presented in your best interest: call our office on 07-34213456; or use the Contact Us facility to arrange a meeting.

1 We have posted an article in our website Library that provides guidance on retirement planning, designed to take away some of the anxiety mentioned: see ‘Preparing for Retirement‘.
2 The preservation age is graduating through a series of changes between the age of 55 and 60, based on your year of birth: the table showing this schedule is published on the ATO website.
3 There exists a table of the minimum pension required to be drawn according to the age of the superannuation account holder: it is updated by the ATO and is linked here.[Note: we have also published an article about funding retirement – including ‘partial’ and/ or early retirement – from non-superannuation monies.]

[This post was originally made in October 2012: it  has been updated in December 2014; and refreshed in June 2016.]