What is a transition to retirement (TTR) strategy?
A transition to retirement income
swap strategy is for those who have reached their superannuation preservation age but are
still working. Rather than receiving all their income as post-tax income, they
have the following options:
Have their employer make a pre-tax
superannuation contribution on their behalf which is a form of “salary
If eligible, they make a tax deductible personal
Other superannuation contribution types may also be appropriate depending on your circumstances
then effectively replace or “swap” this income with a pension drawn from a transition
to retirement Account-based pension that is started with superannuation monies.
This is a tax effective way to increase retirement savings while achieving a
level of net income that meets current living expenses.
Who is a transition to retirement strategy for?
A transition to retirement strategy is certainly not for everyone and you should obtain financial advice prior to constructing the strategy and prior to implementing it. Having said that though, if you have reached superannuation preservation age, then you can certainly consider a transition to retirement strategy.
Transition to retirement has the greatest benefits to those who already have superannuation savings and are still working. The longer you have from the start of the strategy until your retirement, the greater the benefits.
Important considerations of transition to retirement
Everyone's circumstances are of course different and so every transition to retirement strategy will be different. There are many very important aspects to consider in your transition to retirement strategy, but here are just a few of the key ones...
Your tolerance for risk - are conservative, aggressive, or somewhere in the middle?
How much money do you need per fortnight or month to live right now?
Are the tax components of your current superannuation optimised?
Tax consequences (both positive and negative) which may include income tax and contributions tax
Protecting your investments and your income
Now, the times they are a changin'! With tighter contributions caps introduced since the first Federal Labor Rudd Government, the typical TTR strategy has become a tad more complicated in order to drive the same amount of value out of it. And, given that contributions caps change depending on your stage in life, it is very easy to find yourself in a largely ineffective TTR even if it started out right. It is now important to consider alternate contribution types and strategies beyond salary sacrificing to get the most out of your TTR.
Does a transition to retirement strategy always work?
TTR is NOT a "one pill cures all" approach
Yes but only if it is done right.
It is possible to be in a worse tax position after implementing your transition to retirement than you were prior. The "one size fits all" approach to this type of financial strategy does not work and certainly will not guarantee results. Don't copy what your mate is doing or you may find it is completely inappropriate for you!
The investment strategy for your transition to retirement strategy is extremely important to get right because it will determine how well you do when times are good but more importantly will determine how protected your investments are when times are bad.
You should decide on your investment strategy BEFORE deciding on the super fund to use. Not all super funds can accommodate a successful investment strategy simply because they have insufficient investment options in them. Once you have decided on your investment strategy, you can then decide on which investments are going to be most appropriate to you, and then choose the super fund that has the investment options within its investment menu.
Four of the key components to consider when constructing your investment strategy are:
Your tolerance for risk
Income required - both within the fund AND to be drawn from the fund
Opportunity for capital growth
Transition to Retirement & Age Pension
Many people who did not receive financial advice would have noticed a significant change in the Age Pension from January 2015 when Centrelink changed how they treat Allocated Pensions. If you did receive advice in time then you would know that there is and was a strategy available to combat this to protect your Age Pension benefits.
With changes to Centrelink treatment of Allocated Pensions just mentioned and the pending changes to the Centrelink Assets Test from 2017, planning for Age Pension benefits has become absolutely imperative for a lot of people. Essentially, if your invested assets are more than the lower threshold, then you will need to have a plan in place. If you do not, then at least two of the following will happen:
You will not receive the most pension that you could from the start
Your age pension will reduce in 2017 and may never recover
Your age pension will reduce over time
Also, the way the Assets Test and Income Test work now and post January 2017, you do need to start planning as early as possible to avoid sudden reductions in Age Pension benefits. There are strategies available to you! Knowing your REAL options is vital.
Financial Planning Qld is a financial planning firm based in Brisbane, Queensland. We offer a full range of financial planning services and our advice is always underpinned by our Corporate Values. Click here to read more!