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Transition to retirement strategy

Planning for retirement

If you’re not yet ready to plunge into retirement full-time, a transition to retirement strategy provides a flexible way for you to dip your toe in, reduce your workload and supplement your income – all while saving tax. Using a transition to retirement strategy can help you move seamlessly from work to retirement.

On reaching your preservation age you can establish a superannuation pension which allows you to maintain or reduce your work hours. 

Importantly, transitioning to retirement in this way can help you reorganise your finances in preparation for full retirement, help you maintain your income and take advantage of the tax concessions available. This is because the investment earnings and capital gains within transition to retirement pensions are tax free.  In addition to this your pension income stream will be either tax free or tax effective.

For instance, while your transition to retirement pension may be taxed at your marginal rate, you may be entitled to a tax offset of up to 15% of the taxable component of that income. And if you’re 60 years of age or older, you won’t pay any tax on the income you receive from a pension drawn from a previously taxed source.

A transition to retirement strategy can also help you supplement your superannuation savings in the lead up to full retirement. This works because you would be drawing a supplementary income directly from your current super funds allowing you to salary sacrifice a greater percentage of your pre-tax salary into your superannuation.

Effectively, you pay no (or reduced) tax on the income drawn from your superannuation and pay less tax on the salary that is now going directly into your super fund (taxed at 15%1 rather than your marginal tax rate). Over the intervening years, before you move to full retirement, this strategy can leave you in a better overall position when you retire. Of course, this information provides only an overview of the transition to retirement strategy. Your financial planner can work with you to determine whether it’s the right option for you.

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1Subject to the maximum concessional contributions cap. The standard cap is $30,000 for the 2014-15 financial year, however, if you are aged 49 years or older on 30 June 2014, the cap is $35,000. Any contributions above this cap is taxed at the highest marginal tax rate and will count towards the non-concessional contributions cap.