Unlike previous generations, today’s workers can gradually ease themselves out of the workforce and into retirement with the help of a financial product called a ‘transition to retirement pension’ (TRP).
Prior to mid-2005 the only way we could access our super was to retire permanently from the workforce. The trouble was, and still is, that not everyone wants to retire when they reach ‘preservation age’ (that’s 55 if you were born before 1 July 1960, or up to 60 if you were born after 30 June 1964). For many of our over-55s this restriction meant either slogging away at a full-time job or exiting the workforce before they really wanted to.
These days, on reaching preservation age, we can access our super while still holding a job, and TRPs could be the thing that let you work part-time and still pay the bills.
There are pros and cons with TRPs. Accessing your super before you fully retire could have a significant impact on your lifestyle in later years. It also pays to look closely at the fees you pay to the pension provider because over time these can have a significant impact on your invested capital.
The trade-off for accessing your super while still working is that the pension is non-commutable, meaning it cannot be cashed out as a lump sum while you’re still working or aged below 65. You cannot withdraw any more than 10% of your super balance (as at the start of each year) in any single year.
That said, TRPs can extend your working life beyond age pension age. This can offer tax benefits including eligibility for the mature age worker offset, which can reduce your tax bill by up to $500 annually. Working for longer may also make you eligible for Centrelink’s Work Bonus, which lets you disregard up to half of the first $500 of fortnightly income from the age pension income test.
TRPs can also be used to give your nest egg a last minute boost. If you continue working, say, full time, it may be possible to receive income from a TRP while simultaneously salary sacrificing a chunk of your wage into your super. Receiving an income comprised of TRP drawdowns plus wages can be far more tax effective than relying on wages alone, where you are taxed at your marginal rate, meaning you could lose as much as 45% to the tax man. By contrast, any wages you direct into super via salary sacrificing are taxed at a low rate of 15%.
You do need to take care that you don’t exceed super contribution limits – currently $50,000 annually for the over-50s. Contributions over this cap can be taxed at up to 46.5%.
Bear in mind too that cutting back your working week is likely to reduce your employer-paid super contributions as well as other valuable employee entitlements like holiday and sick leave.
If the idea of a TRP interests you, it’s worth speaking to a financial planner for assistance with this type of retirement product. A useful starting point for further information is my ebook – Top Ten Tips to Making the Most of Your Retirement, which you can download from www.paulsmoney.com.au.