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Transition to Retirement – Cut Your Hours, Not Your Income

Article By Adam Hurwood | | Financial Planning
If you’re 55 or over, you may be able to reduce your working hours and use your super to supplement your income. You may even be able to keep contributing to your super while you’re still working.

Who Does This Suit?

This strategy generally works best if you:

  • are aged 55 or over.
  • want to cut down your working hours.
  • have accumulated reasonable super savings to provide an income.

It Works Like This:

The ‘Transition to Retirement’ rules allow you to start taking a pension from your Superannuation even if you keep working. This is intended to allow more Australians to ‘Transition to Retirement’ gradually. To follow this strategy, you need to invest in a ‘non-commutable’ income stream, which pays you a regular income but does not allow you to withdraw a lump sum. This is taxed the same way your salary or other earnings are taxed, at your marginal tax rate with certain concessions. But if you’re over 60, it’s tax-free! This strategy may be further enhanced if you salary sacrifice some of the earnings from your current employment whilst you transition to retirement.

The Benefit

Quite simply: You can maintain your lifestyle while reducing the hours you work.

Case Study: John

(How John netted $33,620 pa for a 2.5 day week)

John will celebrate his 55th birthday in November, and would like to reduce his hours to part-time. He’s happy to take the pay cut as he has just paid off his home loan, but is concerned about what effect his reduced income may have on his lifestyle. He needs $33,000 pa after tax to live on.

John decides to take advantage of the government’s ‘Transition to Retirement’ rules. He will reduce his full-time job to 2.5 days per week, reducing his annual employment income from $60,000 to $30,000. He will then purchase a ‘non-commutable’ Account Based Pension with $200,000 of his superannuation savings to help supplement his lost income.

An Account Based Pension is an income stream where the account balance is attributable to the individual, whilst satisfying minimum payment rules.

Notes: The minimum pension payment for a ‘Transition to Retirement’ income stream is currently 3% p.a. of the balance at 1 July or, if commenced during a financial year, the balance at commencement.
Resident individual tax rates for 2012/13 inclusive of Medicare levy $1.5%, Mature Age Workers Tax Offset and Low Income Tax Offset. Flood levy is excluded.

If you’re thinking of taking advantage of this strategy, please talk to your Altitude financial adviser who can provide further assistance.

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