Transition to Retirement
Some people think a transition to retirement is a complex affair but it need not be.
Basically there are two ways to transit to retirement.
1. Reduce your hours and therefore your income tax and take home pay.
2. Use an account based pension fund.
No. 1 is not particularly helpful and does not help to improve your eventual retirement finance wise, just get you used to working fewer hours.
With No 2, understanding it and how it works is actually quite simple. It is basically a method by which one can use some of your superannuation to increase your eventual retirement income while reducing your current income tax.
We will use an example to show how it works. This may not be the same as your circumstances but the differences are usually in the amounts and what you would like to do.
In this case let's say you are 55 and still working full time, earning 50,000 dollars a year and you want to increase your superannuation so that when you actually retire there will be enough to live on.
You financial advisor can check out if a Transition to retirement (TTR) strategy could be useful to you. If he considers that there are some advantages to a TTR he would then quite likely advise you to transfer most of your super to what is called an Account Based Pension. An Account Based pension is a pension payable from a member's superannuation account from which regular income payments are made following retirement or cessation of employment, or in the case of transition to retirement, whilst still employed from age 55 and over. This saves money as you will no longer have to pay tax on your investment earnings.
You can also boost up your superannuation by using Salary Sacrifice. Here you elect to pay some of your salary before tax into your pension fund. This will reduce your take home pay but it also reduces the tax you pay.
Then, if you wish, you can withdraw up to 10 percent of your pension balance each year to boost your income up to your current level so you can still live at the same standard as you have been doing. In other words, your take home pay remains the same but you will make a big saving in income tax and also have more money when the time comes to retire.
The other way to manage a transition to retirement as we said earlier is to reduce your working hours but this, of course, will reduce your pay so it is not for everyone.
Most superannuation funds will have a pension option but if not there are plenty of others that do. Your financial advisor can organise all this for you.
TTR pensions are only available for members of Accumulation Super funds. Members of Defined Benefit Funds cannot access a TTR pension. You can find out which you are by checking with your superannuation fund provider and if you can change.
If you have any life insurance with your superannuation you will also need to check that it does not cease or reduce if you take up the pension option.
You may not need to draw out any funds as you get closer to retirement. For example the Mortgage usually takes a big slice from ones income. If that is paid off then you can easily live on a reduced income and so put more of your salary into the pension fund.
In all matters financial it is wise to spend some time with your financial advisor to discuss your individual financial needs and what is the best option for you.
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