Alison to the rescue
Barry is a widower who works long hours as a paramedic. What he really wants is to have more time to play with his grandkids.
Joan works for a large supermarket. Her husband has just been retrenched from a major tech company. She wants to enjoy more time with him while they are both fairly active.
Alfred is just plain tired. His wife is calling it burn out. Whatever it is, he needs to cut back his hours.
The good news is that while the motivations to cut down work hours might vary, there is a similar solution for Barry, Joan and Alfred. This strategy often goes under the radar, but offers a really good solution for those who wish to step back – but not out – of the workforce. Our Head of Advice, Alison Squire knows the details. It’s called a Transition to Retirement (TTR) and here’s how it works.
The Transition to Retirement allows you to use an income stream from your superannuation. It can be used to reduce working hours or to maintain working hours and boost super, while potentially paying less tax.
Who can access this strategy?
A TTR is available to those who have met their Preservation Age (which depends upon when you were born). and are still working. For most people this is age 59 or 60.
What are the benefits of using a TTR?
First and foremost, it allows you to work less. But there are further financial benefits, including:
- If you are 60 or older, the TTR payments are tax free
- You can reduce work hours , but with the income stream payments from the TTR you may still have the same total income, or maybe even more
- The reduced working hours can also help you ‘transition’ emotionally to retirement
- You can continue to contribute to super via salary sacrifice and,
- Depending on your marginal tax rate, you could also reduce tax.
Saving on tax
Another benefit of a TTR is the ability to reduce tax. You can:
- Boost super by salary sacrificing more (in most cases)
- Most contributions are taxed at 15% which is likely to be below the marginal tax rate for the majority of people still working
- Take TTR payments which are tax free (for those age 60+)
Are there any downsides?
As with all good news, there can be a downside. Here are some to consider if you feel a TTR might work for you.
If you or your partner currently receive any social security payments, a TTR pension may reduce you or your partner’s entitlements, both now and in the future.
By accessing your super too early, you could affect your income later in retirement.
Your super fund may require you to leave a minimum amount in your accumulation account in order to maintain your insurance cover, which could reduce how much you have to start a TTR.
The tax savings (and super boost) of salary sacrifice into super may not always be worthwhile for both low – and high – income earners. You will need to check what works in your particular circumstances.
At age 65, the TTR income stream converts to an Account-Based Pension (ABP) income stream and triggers your Transfer Balance Cap (TBC) amount at that time. This may have an effect on you or your partner in the future and restrict access to indexed balance caps.
A Transition to Retirement strategy is a really helpful option for those who are keen to start the move from full time employment stage by stage. It offers the opportunity to transition both emotionally and financially.
But as you can see from the above short summary, there are many caveats.
If you, too, think this strategy could allow you to finally go part-time, it may help to book a tailored consultation with one of our experienced advisers who can talk you through the pros and cons for your own particular circumstances.
How did you step back from work?
Did you enjoy a gentle transition?
Or was your move to retirement a little more abrupt?