When we hear the word Pension, most of us think about the Government Age Pension, however, more and more Australians are utilising their Superannuation to fund their retirement.
By planning for your retirement early you can set clear goals to achieve, and work out how much savings you will require to live comfortably whilst enjoying life.
Transition To Retirement
What is TTR?
If you’re on the final stretch to retirement and would love to start winding back your working hours but don’t think you can afford it.
Alternatively, if you plan to keep working full time for a while longer and want to boost your super but haven’t got the ready cash to make extra contributions.
Help could be at hand in both cases in the form of a superannuation transition-to-retirement pension or income stream (TTR). This strategy can be used to either:
- Work fewer hours and use a TTR pension from your super to supplement your income.
- Salary sacrifice some of your salary into super to save tax and withdraw income from your super using a TTR pension to replace some or all the lost income, even if you continue working full time.
From 1 July 2017, the investments underlying a TTR pension are taxed at up to 15% just as they are in a super accumulation account – previously they were tax free. However, these earnings are still exempt if you are over 65.
What has not changed is the taxation of TTR pension income. If you are 60 or older, in most cases your pension payments will be tax free. If you are younger than 60, then the taxable portion of your pension income will be taxed at your marginal tax rate, less a 15% tax offset.
Depending on your personal circumstances TTR pensions have much to offer. They can help you:
- Ease into retirement by reducing your working hours without cutting your income or compromising your lifestyle
- Continue to make contributions to your super accumulation account (or have them made by your employer)
- Receive tax-free pension payments (but only if you are aged over 60)
- Grow your super and save tax via salary sacrifice or voluntary contribution, even if you continue working full time.
The Next Step
Starting a Transition To Retirement pension
You start a TTR pension by transferring some of your super from your accumulation account into a pension account.
The transferred funds don’t count towards your transfer balance cap because you’re still working and therefore not in retirement phase. But the funds in your TTR pension account will count towards your transfer balance cap once you do retire. This cap is currently $1.7 million.
You must leave at least a small balance in your accumulation account so that it remains open to receive your employer’s compulsory 10% super guarantee contributions or any voluntary contributions you may want to make.
Investment earnings in both your accumulation and pension accounts are taxed at 15%.
You must withdraw a minimum of 4% of your TTR pension account balance each year (if you’re aged under 65) up to a maximum of 10%. At least one withdrawal must be made each year.
Once you’re over 65 there are different minimum pension payments rates.
Maximising your super for retirement
Utilising your superannuation is one of the most sure-fire ways to build your savings for retirement. While your employer will contribute to your superannuation, it is not the only way to get funds into it and grow your nest egg for retirement. Like with any savings plan, the earlier you start the bester off you will be. However, the good thing with superannuation, is there are built-in catch-up mechanics that you can utilise.
- Start salary scarifying early: even a small amount of you pay each week can make a difference by the time you retire. If you can afford it, salary sacrificing is one of the most effective ways to grow your super.
- Carry forward unused concessional contributions; from 2019–20, carry forward rules allow you to make extra concessional contributions – above the general concessional contributions cap – without having to pay extra tax. The carry forward arrangements involve accessing unused concessional cap amounts from previous years. An unused cap amount occurs when the concessional contributions you made in a financial year were less than your general concessional contributions cap.
- Consolidate super funds; approx. 40 percent of all Australians with superannuation have more than one fund. This results in more fees paid than necessary, while we can’t guarantee returns, we can eliminate waste. Reviewing your superannuation and any insurance paid from it is important to ensure you are not paying more than you need to.
Retirement Income Strategies
For most people when we think about retirement we think Pension, however, there are a number of ways to generate income during the golden age of your lives.
Also known as Social Security is the Australian Government-funded income support payment for people who have reached pension age, are under the income and asset test limits and have been an Australian resident for at least 10 years.
A super pension is a series of regular payments made as a super income stream. This doesn’t include government payments such as the age pension. Depending on your age and the type of income stream you receive, you may need to declare different items in your tax return.
Personal savings and investments
any personal investment not held within superannuation, this can include but is not limited to share portfolio, annuities or property income. As these assets are held in your personal name, there are tax consequences you need to consider, what might have been a good investment while you were working might not continue to be the best option during retirement.
Most Australians will utilise a combination of all three strategies to support their retirement. By talking to a qualified Financial Planner early, you can set your retirement goals and work towards them in the most effective manner for your unique situation.
Frequently asked questions
Find quick answers to common questions using our helpful FAQs.
When can I access my superannuation?
When you reach your preservation age and retire, you can access your super to fund your retirement.
You can also access your super:
- when you turn 65 years old
- under the transition to retirement rules (if you are eligible), while you continue to work.
You don’t have to cash out your super just because you’ve reached a certain age, however, you need to check if the rules of your particular super fund specify otherwise.
Your preservation age is not the same as your pension age. Your preservation age is the age you must reach before you can access your super and depends on when you were born.
The tax payable on super benefits depends on a number of things, including:
- your age
- the amount of the payment
- whether you receive your super benefits as a super income stream or a super lump sum
- whether your super comes from a taxed or untaxed source.
Some super benefits have a tax-free component and a taxable component. The tax-free component generally includes:
- amounts you have contributed to your super fund without claiming those amounts as a tax deduction
- certain other tax-free amounts you may have rolled into your super fund.
How much money do I need to retire?
ASFA estimates that the lump sum needed at retirement to support a comfortable lifestyle is $640,000 for a couple and $545,000 for a single person. This assumes a partial Age Pension.
ASFA estimates that a modest lifestyle, which covers the basics, is mostly met by the Age Pension. They estimate the lump sum needed to support a modest lifestyle for a single or couple is $70,000.
However, this might not be enough for you, it is important to seek advice on this with a Financial Planner, the team at OakView Financial can sit down with you and work out your required balance to meet your retirement needs.
How do I make voluntary after-tax contributions?
Non-concessional contributions have the advantage of zero tax on the money deposited into your super. The earnings will be taxed at the rate of 15% like the rest of your superannuation and will be tax-free upon retirement. There are caps to how much you can contribute each year and there is also a bring-forward arrangement you can utilise.
- 3 times the annual non-concessional contributions cap over 3 years (that is, $330,000) if your total super balance on 30 June of the previous financial year is less than $1.48 million
- 2 times the annual cap over 2 years (that is, $220,000) if your total super balance on 30 June of the previous financial year is above $1.48 million and less than $1.59 million
- nil ($0) if your total super balance is $1.59 million or above.
These limits are based on the:
- non-concessional contribution cap of $110,000
- total super balance in relation to the general transfer balance cap of $1.7 million.
How much will I receive for my age pension?
To qualify for the full or partial Age Pension you need to meet the Income and Asset tests limits:
Income Test – you and your partner’s income from all sources are assessed. This includes financial assets such as superannuation. To work out how much income your financial assets produce, the Government use deeming. Pensions have income and asset limits. If you’re over these limits, you get a lower pension.
Asset Test – all asset types are assessed as part of the assets test. How much you are paid depends on the value of your assets and if you’re in a relationship. There are limits on your total assets and the Department of Social Services reviews these limits twice a year.
Your assets include any property or possessions you own in full, in part, or have an interest in. This includes:
- assets held outside Australia
- debts owed to you.
When am I eligible for my age pension?
To be eligible for Age Pension you must be Age Pension age and meet some other rules.
On 1 July 2021, Age Pension age increased to 66 years and 6 months for people born from 1 July 1955 to 31 December 1956, inclusive.
If your birthdate is on or after 1 January 1957, you’ll have to wait until you turn 67. This will be the Age Pension age from 1 July 2023.
How much money can you have in the bank and still get the pension in Australia?
The Department of Social Services reviews the eligibility for the Age Pension each year, increasing the upper limits to scale with inflation. Australian Parliament may also introduce policy changes to the limits, it is best to review your retirement strategy with your Financial Planner each year to ensure you are always taking advantage of the best outcome.
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