How a transition to retirement strategy works
A transition to retirement strategy is designed to help you move from full-time work to retirement, in a gradual way.
Essentially, transition to retirement enables you to access your super before you retire, once you’ve reached your preservation age—age 60.
Benefits of a transition to retirement strategy
Taking out a transition to retirement strategy could benefit you in two ways:
1. Reduce your work hours
Transition to retirement can be used to gently move into retirement by remaining in the workforce but on a part-time basis.
To maintain the same level of income, a transition to retirement income stream allows you to make up the difference in lost income from your super. And as you’re still employed, your super savings will continue to be contributed to as well.
2. Boost your super while saving on tax
Transition to retirement can be used to grow a super balance and may help you save on tax while working full time.
When you sacrifice some of your salary into super or make your own contributions that you can claim as a personal tax deduction, each contribution is generally taxed at a rate of 15%. These amounts count towards your concessional contribution cap. This cap is $30,000 per year (for 2024-25).
If your marginal tax rate (the tax rate you pay on your income) is higher than 15%, this may be a valuable strategy to boost your super balance.
For those earning around or above $250,000 per year, some or all these contributions may be taxed at 30% (rather than 15%). However, as your personal income tax rate will be 47% (including the Medicare Levy), tax savings will still generally be available.
Case study #1: reduced work hours
Ben is 60 years old and currently earns $100,000 a year before tax. He decides to ease into retirement by reducing his work hours to three days a week. This means his income will drop to $60,000 a year before tax.
He decides to transfer $200,000 from his super into a transition to retirement income stream. He then withdraws $20,000 a year, tax-free until he retires. The amount in the transition to retirement income stream will replace some of his lost salary, until he decides to retire from the age of 65.
Case study #2: saving tax
Samantha is 60 and earns $100,000 a year. She intends to keep working full-time for at least another five years.
As she wants to increase her retirement savings, she decides to open a transition to retirement income stream. She transfers $100,000 from her super account into a pension account.
Samantha then gives up some of her salary to make additional contributions into her super on a regular basis. This reduces her total income for the year which also reduces her income tax.
As she’s lost some of her income, she decides to withdraw 4% of her transition to retirement income balance each year.
Eligibility and conditions for a transition to retirement strategy
To be eligible for a transition to retirement strategy, you must have reached your preservation age. From 1 July 2024, the preservation age is 60.
Additionally, the Australian Taxation Office sets certain conditions, such as:
- You must withdraw between 4% and 10% of your super account balance each year and at least one withdrawal must be made
- Generally, you can’t access your super as a lump sum payment while still working. It must be taken as regular payments
- The payments received from your transition to retirement income stream may contribute to your taxable income if you are under age 60
- If you or your partner currently receive social security payments, a transition to retirement may affect your entitlements
- A small balance must be left in a super account so you can receive your employer’s compulsory super contributions or any of your own contributions.
Tax on a transition to retirement strategy
Once reaching 60, pension payments are tax-free. However, at 55 to 59, the taxable portion of your pension payments are taxed at your marginal tax rate but you will receive a 15% tax offset.
Any earnings you make from having your money invested in a transition to retirement income stream, is taxed within the super environment at a maximum rate of 15%.
How to start a transition to retirement strategy
Different super funds have different ways of setting up a transition to retirement so it’s worth talking to your fund if you are considering this option.
Generally, you’ll need to follow these steps:
- Contact your super fund and let them know you want to start a transition to retirement income stream
- Complete the necessary application forms and provide the required documentation, including proof of identify and preservation age
- Clarify the frequency and amount of income stream payments you wish to receive within the permitted range.
Alternatively, you can speak to us if you have any questions about this strategy.
* Based on KPMG Super Insights 2023 Report as at May 2023 KPMG Super Insights 2023 Report
This article has been prepared by NULIS Nominees (Australia) Limited ABN 80 008 515 633 AFSL 236465 (NULIS) as trustee of the MLC Super Fund ABN 70 732 426 024. NULIS is part of the Insignia Financial group of companies comprising Insignia Financial Ltd ABN 49 100 103 722 and its related bodies corporate (‘Insignia Financial Group’). The information in this article is current as at June 2024 and may be subject to change. This information may constitute general advice. The information in this article is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider obtaining independent advice before making any financial decisions based on this information. It is recommended that you consider the relevant Product Disclosure Statement (PDS) and Target Market Determination (TMD) before you make any decisions about your superannuation. You can obtain the latest copy of the PDS (or other disclosure documents) and TMD by calling us on 132 652 or by searching for the applicable product at mlc.com.au. You should not rely on this article to determine your personal tax obligations. Please consult a registered tax agent for this purpose. Opinions constitute our judgement at the time of issue. The case study examples (if any) provided in this article have been included for illustrative purposes only and should not be relied upon for decision making. Subject to terms implied by law and which cannot be excluded, neither NULIS nor any member of the Insignia Financial Group accept responsibility for any loss or liability incurred by you in respect of any error, omission or misrepresentation in the information in this communication.