Transition to Retirement
The Background
Sam is 60 and works full time earning $120,000 pa. She has a retail superannuation fund with an account balance of $300,000 (70% taxable and 30% non-taxable). She has indicated that she requires $50,000 pa to cover living expenses.
The Issue
Sam enjoys her work and therefore does not want to permanently retire. She would however like to reduce her working hours so she can spend more time with her grandchildren. She anticipates that she would like to work 3 days per week and she would like to permanently retire at age 65.
The Solution
Sam has sought advice from Utopia Financial Services and we advised her to commence a Transition to Retirement Income Pension (TRIP) from her accumulated superannuation benefits and salary sacrifice $90,000 pa to super. To supplement the loss in salary, Sam will draw a TRIP of $30,000 pa and as Sam is over 60 years of age, all of her pension income will be tax free.
The Results
The table below shows the difference in tax payable and disposable income between her current and proposed situations;
| Income |
Before |
After |
|
| Salary |
120,000 |
120,000 |
| Salary Sacrifice |
0 |
-90,000 |
| Account Based Pension |
0 |
30,000 |
| Total Income |
120,000 |
60,000 |
| Less: Tax-free portion of Pension |
0 |
30,000 |
| Total Assessable Income |
120,000 |
30,000 |
| Taxable Income |
120,000 |
30,000 |
| Tax Liability |
35,800 |
2,850 |
| Less: Mature Age Worker Tax Offset |
0 |
500 |
| Estimated Tax Payable |
35,800 |
2,350 |
| Net Income after tax |
84,200 |
27,650 |
| Add: Tax-free portion of Pension |
0 |
30,000 |
| Disposable Income |
84,200 |
57,650 |
| Super contributions (net of 15% contributions tax less $30,000 TRIP) |
0 |
46,500 |
| Total |
84,200 |
104,150 |
|
| Net benefit |
|
19,950 |
Sam is able to reduce her working hours to 3 days per week while continuing to have sufficient income to meet her living needs. By salary sacrificing more of her income to super than what she is drawing out of as a pension, she will ensure that her superannuation balance continues to accumulate. As she is in pension phase, any earnings and capital gains within the TRIP fund will not be taxable as opposed to a 15% tax environment when in the accumulation phase of superannuation.
Sam knows that she will not be able to access any additional funds from superannuation until she satisfies a condition of release such as retirement from the workforce and she is comfortable with this as she has a cash buffer outside of superannuation.