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Ease into retirement
From 1 July 2005, older Australians could start accessing their preserved super benefits without having to retire, enabling them to ‘transition to retirement’ by cutting back working hours without having to accept a lower standard of living due to reduced income. The Government’s new transition to retirement rules are designed for people who have reached their preservation age (see table below) and wish to use their super to buy a special type of pension called a non-commutable income stream (NCIS). The catch is that these types of pensions will generally restrict your ability to withdraw additional lump sums – know as ‘commutations’. You generally just get the income payments until you meet a condition of release (e.g. reach age 65 or retire full-time).
Non-commutable income streams are paid either as ‘complying’ pensions such as Term Allocated Pensions (TAPs), or as ‘non-commutable’ allocated pensions. Complying pensions are typically more restrictive in that, after an initial cooling-off period, they don’t allow you to transfer your money back into super should you decide to go back to full-time employment at some future date. However, non-commutable allocated pensions don’t offer other advantages that TAPs offer, such as a 50% exemption from Centrelink’s Assets Test. As is often the case with decisions regarding your super, it’s not straightforward and what is right for another person may not be right for you. It’s best to check with your financial adviser who can assess your individual needs. Here are some key questions you should consider when talking to your financial adviser about non-commutable income streams:
So how might it work exactly? The case study below provides an example.
Case study Fifty-six year old ‘Peter’ is working 40 hours a week and earning a before tax salary of $60,000 p.a. (including 9% employer super contributions of $4,954). He wants to move to part-time work, which means his before tax salary will drop to $36,000 p.a. (including employer contributions of $2,972). Peter can expect an annual income of about $20,000 from his non-commutable allocated pension. And because he is within his Reasonable Benefits Limit, he will receive a 15% pension offset to reduce the amount of tax payable on his pension income. Based on the new tax rates introduced in the 2006 Federal Budget, Peter’s net position is explained in the table below.
Peter’s able to reduce his work hours as he transitions to retirement whilst maintaining almost the same level of income and still having contributions going into his super account for the future when he goes into full-time retirement. Want to know more?
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Achieve is issued by Russell Investment Management Limited (RIM), ABN 53 068 338 974, AFSL 247185. In preparing this information we haven’t taken into account your own personal circumstances, including what you want and need for your financial future. It is important for you to consider these matters and also to obtain and read the relevant PDS before you decide whether to acquire or to continue to hold a product. Go to www.yoursupersolution.com.au to download a PDS. Interests in Russell SuperSolution are issued by Total Risk Management Pty Ltd.
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Not ready to give up work completely? Perhaps you want to cut back your working hours but not your level of income. If so, and you’re over 55, you may be able to start drawing on your super without going into full-time retirement. 