Tax Advantages, a Super Boost and a Simpler Transition to Retirement

It sounds like an impossible trifecta. However, thanks to some recent government legislation, the jump from work to retirement need no longer be a dramatic event. In fact, taking advantage of ‘transitioning to retirement rules can provide significant tax benefits and give your superannuation a helping hand.

Prior to July 2005, to access your preserved superannuation benefits you had to satisfy a number of conditions. Generally, upon turning 55 you had to declare yourself permanently retired or that you had no intention of carrying on paid employment for more than 10 hours per week. This meant that many people chose to retire prematurely, just so they could access their super.

This situation was impractical, especially considering the flexible and multi-faceted workplace that exists today. In response, the government announced changes to superannuation that make the transition to retirement simpler.

Easing into retirement
Now, if you have reached your preservation age, generally 55 years of age for most people, you are able to draw on your super without having to retire permanently This means that you can continue to work and access a portion of your super to supplement your income.

Accessing kinds while still being in the workforce can be done through the use of a non-commutable allocated pension, which provides a regular payment to the purchaser. The amount received for each payment can be varied within maximum and minimums set by government regulations.

Essentially, a non-commutable allocated pension is an allocated pension that does not permit lump sum withdrawals. In the financial industry they are mown as NC~4Ps (non-commutable allocated pensions). Importantly, it is possible to roll back the allocated pension at any stage into your superannuation kind, for example if the income stream was no longer required.

Tax advantages and a super-building strategy
As a consequence of these rules, an innovative strategy to access significant tax advantages emerged. This strategy also potentially enabled the pending retiree to give their superannuation a substantial boost.

Because there is no requirement for you to reduce your working hours in order to receive the NCAF it becomes possible to salary sacrifice a substantial portion of your income into superannuation while still receiving a regular payment from your super kind.

Why would you want to salary sacrifice your income while receiving an NCAP? Two reasons:

   1. Your super kind will generate tax-free investment earnings because it is no longer in the accumulation phase.

   2. Taxable pension income is eligible for a 15 per cent tax offset, whereas your salary would otherwise be fully taxable.

Not surprisingly, when the strategy first emerged, some were worried that the Australian Tax Office (ATO) might see it as tax avoidance. But concerns have been laid to rest, with the Commissioner of Taxation confirming on 17 November 2005 that such a strategy would not be considered avoidance, even where someone did not reduce their work hours.

Speak to your financial adviser about how you can make a relaxed and financially beneficial transition to retirement.

Case Study
Doug, aged 55, earns $70,000 per annum and has $450,000 in his current super account. Fortunately, Doug enjoys his job and is looking forward to working full-time until he reaches the age of 65.

Doug’s financial adviser suggests he begins salary sacrificing some of his income in order to build the amount of kinds available for his retirement. But Doug explains he cannot currently afford to lessen his take-home income. Despite this, his financial adviser explains that by beginning an NCAF he can supplement his income via his current superannuation fund, while sacrificing the equivalent amount into his super.

Doug expressed surprise at the suggestion; how can taking money from super and putting it back again, boost the amount in his super? The confusion is understandable because Doug still receives the same income and so he believes the net result would be the same.

Doug’s financial adviser explains that the tax advantages of the strategy means that the super fund’s investment gains will be tax-free and the NCAP income is eligible for a 15 per cent tax offset. Working through a number of tables and presumptions, he shows Doug that the strategy would give him additional super, by the time he is 65, of up to $86,109.

Ask your financial adviser how you can benefit from NCAPs and new transitioning to retirement regulations.

Disclaimer:

No investment advice provided to you.
This web site is not designed for the purpose of providing personal financial or investment advice. Information provided does not take into account your particular investment objectives, financial situation or investment needs.

You should assess whether the information on this web site is appropriate to your particular investment objectives, financial situation and investment needs. You should do this before making an investment decision on the basis of the information on this web site. You can either make this assessment yourself or seek the assistance of any adviser.
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