Super Tip - Top up your income when cutting back work 27 Sep 2017

Blog / SMSF

If you plan to scale back your working hours, starting a transition to retirement pension could help you to replace your reduced income.

How does the strategy work?

To use this strategy, you need to invest some of your super in a transition to retirement (TTR) pension.

The key benefit of doing this is you can receive an income from the TTR pension to replace the income you’ll forgo when reducing your working hours.

Also, you’re likely to pay less tax on the income you receive from the TTR pension than you do on your salary or business income.

This is because even though the taxable income payments from a TTR pension are taxed at your marginal tax rate, they will attract a 15% tax offset between preservation age¹ and 59. Also, the income payments are tax-free² at age 60 or over.

As a result, you’ll generally need to draw less income from the TTR pension to replace your reduced salary, as the Case study on the opposite page illustrates.

Other key considerations

There are some key issues you’ll need to consider before starting a TTR pension. For example:

  • you’ll need to draw a minimum income each year, which is 4% of the account balance per annum
  • you can’t draw more than 10% of the account balance each year, and
  • you can only take a cash lump sum (or purchase a different type of income stream) once you permanently retire, reach age 65 or meet another ‘condition of release’.

Please note If you have reached your preservation age and retire permanently (or meet another condition of release) you may be able to invest your super in an ordinary account based pension, rather than a TTR pension.

No tax will be payable by your fund on investment earnings in an account based pension, whereas earnings in a TTR pension are taxed at a maximum rate of 15%.

Also, an account based pension is not subject to the maximum income and withdrawal restrictions associated with a TTR pension.
However, lifetime limits regulate how much you can transfer into an account based pension. In 2017/18, this limit is $1.6 million (subject to indexation).



SUPER TIP – Simple explanation of super strategies:

The following links are other super tips – click below

Convert your super into a tax-effective retirement income
Make insurance more affordable
Top up your super with help from the government
Convert business capital into tax-free retirement benefits
Sacrifice pre-tax salary into super

 

 

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Disclaimer and Warning
The information above is of a general nature only.  It should not be used as a source to make financial decisions.  It's also important to note that the legislation and figures related to this topic tend to change regularly and therefore the information above may not reflect the current status.  We recommend that if you are looking for advice on this matter, you should contact
us.

 

 

 


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