Pre-Retirement & Retirement Strategies – Part 1
Are you considering retirement in the next few years? Are you looking to make a smooth transition from full-time work to part-time work before retiring? Are you looking to make the most of your financial resources before you retire?
If this is you, then over the course of the next several weeks I’ll be discussing several smart, yet simple, superannuation strategies which you can consider implementing today. These strategies could help you take your wealth and hard work to the next level and have you prepared for that all important change in your life.
The decision to retire and when to retire is often a hard one to make. For some, this monumental change in your lifestyle can be a time of great excitement, knowing that you have worked hard, saved prudently, invested wisely and that you have set yourself up for a lifetime of financial security beyond your working years. For others, it can be a time of great uncertainty. Questions will often arise around whether you have sufficient income to provide for the lifestyle you desire, and if not, whether your capital will be sufficient to last to the end of your lifetime.
With that in mind, even if you believe that you are some time away from retirement, the best time to start planning for it is, has and always will be TODAY.
Before any discussion around retirement and pension strategies can take place, it is important for you to first of all grasp the basics of the superannuation system and the pre-retirement and retirement pension rules. From there, after laying the foundation for the discussion, over the course of the next several weeks, I’ll discuss several topics and strategies which can be implemented today, all with a view to giving you the foundation you need to explore these concepts in more detail. This will hopefully allow you to consider how these concepts might apply to your situation.
So without any further delay let’s get into the basics of superannuation as they apply to pre-retirees and retirees.
The Accumulation Phase V’s The Pension Phase
Any discussion around retirement planning is almost pointless unless you have a good grasp of the issues surrounding the two phases of superannuation, being “The Accummulation Phase” and “The Pension Phase”. As superannuation is a taxation vehicle to accumulate wealth, you can probably guess that the major distinction between the two phases is that the taxation treatment applied varies between them. So what’s the difference?
The Accumulation Phase is that phase in life where you are typically looking to do the hard work of saving for retirement. This is the phase where contributions to superannuation are being made and you are looking to build up your superannuation nest egg. This is the phase where, as an investor and accumulator of wealth, you can make the decision to spend now or delay spending today in the hope that at sometime in the future, you will be able to spend even more. In this phase the government incentivises you to make delayed purchases by offering tax breaks for those who wish to go without today and invest for their future.
Under today’s current rules, as a typical person working full-time earning an income either from employment or a business venture, the odds are that you are being taxed at a marginal tax rate of at least 34% (32.5% plus 1.5% medicare levy). A table of the 2013 tax rates is provided below:
Even if you are not in that tax bracket or higher, for every dollar earned over $18,200, you are at least looking at a 19% tax rate.
So at a flat income tax rate of just 15% on income that is saved rather than spent or invested outside superannuation, superannuation, despite the recent changes, remains a highly appealing place to be putting your hard earned money.
BUT that’s not all….. The money you put into the superannuation environment also benefits on an ongoing basis as well, because the concessional tax treatment doesn’t just end with the contribution of pre-tax money. The tax benefit is double edged. Remember, once that money is invested within the superannuation environment, not only would you be commencing your investment with a significantly higher number of dollars after tax, BUT any returns (dividends, rent, interest, capital gains etc) are also taxed at the concessional tax rates.
Take a look at the table below:
But the benefit doesn’t stop there. For those who are investing for capital gains it gets even better. If you were to hold your investment for longer than 12 months, while that investment outside superannuation would only have had half of the gain assessed at your marginal tax rate (an effective maximum marginal tax rate of 23.25%), for most, this still wouldn’t be as tax effective as having 2/3’s of the gain assessed at the superannuation tax rate of 15%, (an effective maximum tax rate of 10%).
Now if you thought that was pretty damn good, the story gets even better for those in the Pension Phase.
The Pension Phase, the alternative phase to the accumulation phase, is that phase of your life when you have reached an age which you can access your funds, generally age 55, and you can AND do draw down at least once each year, a proporion of your superannuation benefits via a specific arrangement called a superannuation pension or income stream.
So what’s the significance of this? Well the significance is that having commenced the drawn down of benefits, your superannuation benefits now get treated a whole lot better again. You see, as soon as you establish a superannuation pension, all of a sudden you have turned those assets that support the payment of that pension into tax free assets. That is, those assets will never have tax levied on them again for any investment returns that may be generated and neither will any returns on the returns, under current superannuation rules, for the life of the pension.
Now in order for that to occur, you first need to:
1 – Have met a condition of release, and
2 – You need to have drawn down a mandated minimum amount of your fund by way of a pension payment
Meeting a Condition of Release
A condition of release is a mandated condition clearly defined by law as a condition in which will allow you to access your superannuation benefits. You will have met a condition of release if you have been determined to have:
- Retired after attaining your preservation age.
- Terminated employment after age 60.
- Attained age 65.
- Been permanently disabled (Evidence required by the Trustee who will make the final decision).
- Been diagonsed with a terminal medical condition (requires 2 medical practioners, one a specialist, to certify that the condition is likely to result in death within 12 months).
- Permanently departed from Australia (Available for certain temporary residents holding a specific class of visa).
- Been granted access to your benefits by APRA on compassionate grounds (i.e. to pay for medical costs for you or a dependant).
- Been experiencing financial hardship.
If you have not met one of the above conditions of release, you generally will not be able to access your superannuation benefits. There is, however, an exception to this rule and that is where you have attained your preservation age but have not retired from gainful employment. In this situation, you may be eligible to start a “Transition to Retirement Income Stream” or TRIS.
Your Preservation Age
To determine your preservation age you can review the table below.
Minimum Pension Payment
Once you have deteremined that you want to start a superannuation income stream, you have determined that you are eligible and you have completed the necessary documentation, in order for that pension to have been considered to have been in operation for the financial year in question, you now need to have at least made one pension payment from the super fund with a minimum amount of your fund having been paid out of the account. These minimum amounts are determined based on your age and the balance of your pension at the start of the financial year or the date at which you first commenced the pension if the year in question was the first year of the pension. See the table below.
You should also be aware that the above pension amounts will also be subject to a pro-rata amount should you chose to set the pension up part way through the financial year in question. Furthermore, if you establish the penion from 1 June to 30 June, you will also be exempted from the above pension payment rules for that year.
I hope that helps to lay down the basics of the the two phases of superannuation.
Be sure to look out for next week’s instalment of our newsletter as we take a look at the two most common forms of superannuation pensions utilised today and explore a powerful tax saving strategy, a strategy which could help you save thousands on tax each year while you are still working.
If you are looking for advice on how you can best structure your superannuation arrangements, contacts us today for a No Cost, No Obligation consultation on 03 8657 7640 or email [email protected]. We would be more than happy to review your superannuation strategy and give you the advice you need for more tax effective investment returns.
The information contained in this report is General in nature and has been prepared without taking into account your objectives, financial situation and needs.