Get a tax effective pension while you are still working!

Contributed by Brett Davies Lawyers - Please contact Norbert Cornell at norbert@accountants.com.au or on 61 2 99568008 or 61 437 381288

If you are 55 and over, you now have the option of easing into retirement. You can reduce your working hours without reducing your income. You can top up your reduced income with a regular ‘income stream’ from your superannuation savings. This is called the transition to retirement measure.

Until recently, you could only access your superannuation once you turned 65 or retired. This meant it was difficult to reduce your hours of work and still maintain your standard of living. With this new measure, you can roll some or all of your superannuation over into a retirement income stream. Then you can top up your reduced income by drawing on your superannuation.
Access to superannuation benefits may only be allowed as:

* A non-commutable complying income stream (complying lifetime, life expectancy, or market linked income stream), or

* A non-commutable allocated income stream (with restrictions on the ability to commute a lump sum).

How does it work?
A transition to retirement income stream is commonly used with a salary sacrifice arrangement. People are able to sacrifice their salary into superannuation and supplement their income by withdrawing money from their superannuation fund as an income stream.

Since 1 July 2007, withdrawals from a complying superannuation fund for people aged 60 and over are now tax free. This increases the tax effectiveness of the strategy for people who continue to work after age 60. Contributions to the fund are taxed at the concessional rate of 15% rather than a person’s marginal tax rate and pension income drawn from the fund will be tax free.

For people aged 55 to 59, the transition to retirement strategy is still tax effective as the taxable pension income drawn from superannuation attracts the 15% pension tax offset.

The concessional contribution cap will impact people using a transition to retirement income stream/salary sacrifice strategy. There is also the disincentive of salary sacrificing amounts above the cap, as excessive contributions are taxed at 46.5% (instead of 15%) and count towards the non-concessional contribution cap.

Under the new pension standards, a transition to retirement income stream will have a minimum and maximum pension payment. Since 1 July 2007, the income stream needs to pay a minimum pension payment of 4% of the total purchase price of the pension and a maximum of 10% per year. If an individual is looking to commence this strategy and to maintain their net income position, this could potentially limit the amount of income that an individual can withdraw. The amount an individual can draw will be limited by the thresholds and the amount of capital they have, as the payments are based as a percentage of the total fund balance.
Can I access my superannuation benefits in a lump sum?

No, this transition to retirement measure only allows you to access your superannuation benefits as a ‘non-commutable’ income stream, not a lump sum. This means that you generally still cannot take your superannuation as a lump sum cash payment while you are still working. You will need to take your superannuation benefits as regular payments.

You need to be aware what impact this measure can have on you and your personal circumstances. Some parts of this measure are complex, and equally complex to set up and maintain. You should see a financial adviser, accountant or your tax agent to help you decide if this measure is right for you.
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