Transitioning to retirement
If you're over the age of 56, you should consider a transition to retirement (TTR) strategy. While it can be quite complicated to explain, the simple fact is that it's a very effective way to simultaneously reduce tax and increase your super balance.
A TTR strategy is based on a number of principles:
- Once you reach your preservation age (currently 56), you can withdraw between 4% and 10% of your super each year as a TTR pension.
- Pension income is tax-effective. Your pension payments are taxable under age 60 but you will receive a 15% tax offset on the taxable portion to reduce the amount of personal income tax. After age 60 the pension payments are completely tax free to you
- Your salary is not nearly as tax-effective – your marginal rate can be as high as 46.5%.
So, why not use tax effective pension income to replace some of your salary?
The part of your salary that is being replaced by pension income, can be put back into your super account by way of a salary sacrifice arrangement (which is also tax-effective), although it's important to remember that there are caps to how much you can contribute to your super each year.
This creates a circular flow of money. You're taking money out of super through a pension but you're putting money back into super through salary sacrifice. Because salary sacrifice uses pre-tax dollars, more money is going in than is coming out but you still maintain the same income.
If this all sounds a bit complicated, you can download our flyer which provides worked examples to show how it works. Or better yet, speak to your financial adviser who can show you how it would work in your particular circumstances and calculate exactly how much tax you would save.