Ask the Expert: Shift to retirement doesn’t mean stopping work
Once you hit age 60 you can start to access your super, up to 10 per cent of your balance each year via a “transition to retirement” pension.
Question 1
I always find your column a “must-read”, thanks for the always useful info.
I suspect this is a basic question, but talking to my super fund hasn’t really answered it.
I’m 60, single, with $500,000, I earn about $100,000 a year working four days a week, own no property and am renting (I’m hoping inheritance of the family home will resolve the housing issue).
I understand I can now draw on my super tax-free to replace that one day’s work I’ve dropped.
I’m not yet salary sacrificing, but understand I can, in effect, replace what I draw down back into my super, reducing taxable income.
Have I understood that correctly? I can draw my super tax-free, but sacrifice salary into it pre-tax? If that is correct, it seems a no-brainer in my circumstances.
Yes, you have broadly understood that correctly.
Once you hit age 60, you can start to access your super, up to 10 per cent of your balance each year via a “transition to retirement” pension.
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These pensions are used for two main purposes.
- First, to top up your existing income. Often as a result of going part time.
- Second, they are used to pay a tax-free income to replace employment income you are salary-sacrificing to super. Salary sacrificing is a very tax-effective way for most people to build up their super.
Let’s look at an example for someone roughly in your situation (someone earning $100,000 a year).
If they salary sacrificed, say, $15,000 to super every year, instead of taking it as income, they would save $4800 in income tax and Medicare levy ($15,000 x 32 per cent). However, they would need to pay superannuation contributions tax of $2250 ($15,000 x 15 per cent).
This provides an overall tax benefit of $2550 ($4800 less $2250).
If you don’t need the extra income, you can just leave at that step.
But, by salary sacrificing $15,000 you would have less income of $10,200 to live on ($15,000 less tax saved of $4800).
You could replace some or all of that lost income by drawing money from your super via a “transition to retirement pension”. The money drawn out of your super after 60 is all tax free.
There is no need to transfer all of your super into one of these pensions. Just enough to meet your income requirements.
Your regular accumulation account stays open to receive ongoing employer and salary sacrifice contributions.
This is a very popular strategy.
Question 2
Stay informed, daily
Hi Craig. I look forward to your Q and A every Monday and have learnt a lot from your answers.
I retired 18 months ago and commenced a pension from my HESTA super fund in February this year, closing my accumulation account.
I did some casual work during the federal election this year and a super account was created for me with AustralianSuper, current value is less than $100. Is there any benefit or tax advantage to me to maintain this fund and add money from my savings to it?
I have no other work lined up as yet.
Thank you and kind regards, Steph
Hi Steph,
Thanks for your comments.
If you had some sizeable savings outside of super, it could be worth contributing some to super, then down the track combine them with your existing income stream as it is very tax-effective (no tax on earnings or payments).
However, there are age limits on when you can contribute (up to age 75) as well as contribution limits, depending on your total super balance.
Additionally, if it’s likely you will do some paid work in the future, it might be administratively easier just to maintain a small super account for future payments.
There are rules for super balances below $6000 that cap fees so your balance doesn’t get eroded too quickly by such fees. AustralianSuper does a good job of explaining it here.
But if either of the above does not apply to you, then you can simply withdraw the funds and close the account.
Question 3
My mother recently became a war widow due to my father having a veteran’s TPI card.
She is going to apply for a war widow’s pension at the Department of Veterans Affairs. Is this pension subject to the income and assets test. She has approximately $400,000 in assets
The war widows’ (and widowers’) pension is paid to compensate widows/widowers of veterans whose death has been caused by or related to war.
As a compensation payment, this pension is not means-tested and is non-taxable. The DVA can provide further information.
