Transitioning to retirement

With 2014 now underway, those planning for their retirement should take stock of where they are today and where they want to be at retirement.

If you are aged 55 to 64, there are exciting Transition To Retirement (TTR) strategies to consider, even while still working. While your SMSF may be the best vehicle to manage these strategies, you can still use other types of super funds to implement them.

There are a couple of key points to note with this type of strategy;

1. When you are growing your super balance (‘accumulation phase’) you pay tax on your earnings at 15%.

2. When you start to draw down on your super (‘income stream’) you pay no tax on your earnings.

Save tax while working

You may notice we use the term ‘income stream’ rather than the technically more correct ‘pension phase’. We do so to highlight that while people typically associate ‘pension phase’ strategies with retirement, a tax effective ‘income stream’ is actually an exciting opportunity for those still working.

In the simplified $500,000 SMSF portfolio example below, which has of course been effectively invested into high yielding shares and fixed interest producing strong levels of franking credits, we can expect a net tax return of $2,845 p.a. This results in a net income of $27,595 or 5.5% of your portfolio.

Value $

Yield %

Yield $

Franking $

Cash

50,000

2.50%

1,250

Fixed Interest

200,000

5.50%

11,000

2,357

Shares

250,000

5.00%

12,500

5,357

TOTAL

500,000

24,750

7,714

Taxable Income

32,464

Tax @ 15%

4,870

Franking Rebate

7,714

Net Tax

– 2,845

Net Income

27,595

 

By moving your super to income stream all earnings become tax free. In the above example, you would increase your tax return by $4,870 to $7,714 (as all excess franking credits are refunded as cash), and this then increases your net income to $32,464 or a 6.5% yield, a fantastic result. However, there are other areas to consider.

Aged 55-59 – analyse your options

How you can take advantage of TTR will depend on your age and when you turn 55. For those aged 55 (or older depending on your ‘preservation’ age) to 59, a TTR strategy may make financial sense, depending on your personal circumstances.

If you’re still working aged 55 to 59, you can commence a TTR income stream; however, there are important catches.

One is that you have to draw at least 4% of your super balance (up to a maximum of 10%) annually. Another is that your income stream becomes taxable at your marginal tax rate, less an attractive 15% offset. If the estimated tax saved on your super earnings is greater than the tax paid on the income stream after the tax offset, then a TTR strategy can be effective.

If you commence a TTR income stream while still working, you will retain a super accumulation account to accept your super guarantee and any salary sacrifice contributions you make. You can ‘re-set’ your TTR each year (combine the income stream and accumulation balance) to optimise its tax effectiveness.

If you’re 55 to 59 and retired, you should consider commencing an account based income stream rather than a TTR income stream.

Aged 60-64 – stop paying too much tax!

For those aged 60 to 64 and still working a TTR strategy can become a ‘no-brainer’. You can shift your super to an income stream ensuring your super earnings are tax free while at the same time draw your income stream tax free from super. It’s the best of both worlds!

TTR and salary sacrifice – save even more tax!

Those aged 55 to 64 can use a salary sacrificing strategy in clever combination with a TTR strategy to further save tax, boost your family’s retirement savings and maintain your family’s cashflow. This results in the same level of after tax income in your pocket each month, combining a reduced salary with a top up in pension income.

When considering these strategies, the effectiveness will depend on each individual’s particular position, so it is important to seek proper advice from the team at Knight.

 

Knight Financial Advisors Pty Ltd is a Corporate Authorised Representative of NKH Knight Holdings (AFSL 438 631) ABN 30 163 152 967. The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances and objectives. We recommend you obtain professional financial advice specific to your circumstances.