Boost your retirement savings without reducing your net income
If you are aged 55 and over, a transition to retirement strategy can make a real difference to your retirement savings.
Transitioning to retirement strategies (TTR) – can be a very powerful way for many people approaching retirement to give their retirement savings a boost or alternatively ease into a new routine where less working hours are the norm. Clients can retain flexibility around their income and boost their super balance through making increased tax effective contributions.
How it works
With a transition to retirement strategy, you could roll all or part of your existing superannuation benefits into a transition to retirement pension (TTR). Alongside receiving a regular income from the drawing down of up to 10% per annum of your TTR pension, you would continue to make additional contributions into your super account in an effort to boost your overall retirement savings balance.
Through this strategy you would still be receiving about the same take home salary, but pay less tax on your regular salary as a result of salary sacrificing additional amounts into your super than you would normally if you took it as regular take home salary. In this way you would be giving your super contributions and balance an additional boost before you retire.
At age 56, Jonathan understands he needs more super than the $250,000 he has currently saved in super, and he has the goal to retire at 65.
Jonathan would like to put more into his super but has still has financial responsibilities including the remainder of his mortgage and current living expenses.
His gross salary is $75,000 per annum and he requires about $57,500 net per annum to meet his regular expenditure. His employer currently contributes 9.5% super guarantee (($7,125) per annum to his super fund on his behalf.
After consulting his financial adviser he decides to arrange with his employer to salary sacrifice $27,812 of his annual pre-tax income to super. To supplement a reduced take home income he commences a transition to retirement pension using $226,300 of his super and takes a pension payment of $22,630 in the first year (10% of his transition to retirement pension balance).
Jonathan is able to maintain his current level of take-home pay with the additional income from his transition to retirement pension, while boosting his super by $3,529 after just one year.
If Jonathan maintains a similar strategy in subsequent years, by age 65 his retirement savings could be boosted by $76,794 without having impacted his current lifestyle or other financial commitments.
Current approach $
With a TTR strategy $
|Salary Package (incl. Super Guarantee (SG))||82,125||82,125|
|Super Guarantee (SG)||(7,125)||(7,125)|
|Salary Sacrifice (SS)||0||(27,812)|
|Gross Salary (after SG & SS)||75,000||47,188|
|Transition to retirement (TTR) pension income||0||22,630|
|Gross income tax||(15,922)||(14,238)|
|Low Income Tax Offset||0||0|
|Income Tax Rebate – 15%||–||3,394|
Superannuation & Pension
|Superannuation & Pension Balance||250,000||250,000|
|Super Guarantee (SG)||7,125||7,125|
|Less contribution tax||(1,069)||(5,240)|
|Less pension income||0||(22,630)|
|Net super contribution||6,056||7,067|
|Retirement saving projected balance Year 1||268,732||272,261|
|Retirement saving projected balance at age 60||355,515||384,150|
|Retirement saving projected balance at age 65||501,849||578,643|
Potential Gains from the new Strategy
|Retirement saving projected boost Year 1||+ 3,529|
|Retirement saving projected boost at age 60||+ 28,635|
|Retirement saving boost at age 65||+ 76,794|
Taxation – Year 1
|Personal – Income Tax||(15,922)||(14,238)|
|Personal – Medicare Levy||(1,500)||(1,396)|
|Personal – Income Tax Rebate||0||3,394|
|Superannuation – Income tax on contribution||(1,069)||(5,240)|
|Total income tax and Medicare levy payable||(18,491)||(17,480)|
Salary increases at 2.50% pa
5% net return in the accumulation phase
6% net return in the pension phase
Pension refresh strategy applied
Lifespan can assist you in assessing the merits of this strategy and show you how to use a salary sacrifice strategy to improve your super savings and how you can withdraw up to 10% a year of your existing super savings to replace the income you sacrifice.