Those heading towards their retirement should take stock of where they are today, and where they want to be at retirement.

By independent financial planner Tim Mackay.

If you’re between the ages of 55 to 59 or 60 to 64, there are exciting Transition To Retirement (TTR) strategies to consider, even while still working. While your SMSF may be the best vehicle to manage these strategies, you can still use other types of super funds to implement them.

To tax or not to tax

When it comes to the tax on your hard-earned retirement savings, we are strong believers in paying your exact dues to Mr Hockey and never ever leaving a tip. For those 55 and over, carefully note the following:

  • When you are growing your super balance (‘accumulation phase’) you pay tax on your earnings at 15 per cent
  • When you start to draw down on your super (‘income stream’) you pay no tax on your earnings.
  • When it comes to this choice it isn’t a trick question: most people would prefer not to pay tax. Generally speaking, the sooner you can convert your super to an income stream the more tax you’ll save, and the more funds you’ll have to fund your dream retirement.

Save tax while working

You may notice we use the term ‘income stream’ rather than the technically more correct ‘pension phase’. We do so to highlight that while people typically associate ‘pension phase’ strategies with retirement, a tax effective ‘income stream’ is actually an exciting opportunity for those still working. In the simplified $1m SMSF portfolio example in the table below, a yield of 4.8 per cent or $48,000 results in tax of $7200 per annum.

By moving your super to income stream all earnings become tax free. In the tabled example, you stop paying Mr Hockey $7200 each year. If that covers the cost of a nice annual holiday in retirement, we think that’s a good thing for your family.

Okay, this strategy can clearly make sense but some readers may have jumped one step ahead and be asking ‘how do I do it?’ and ‘what are the catches?’

Aged 55-59 – analyse your options

How you can take advantage of TTR will depend on your age and when you turn 55. For those aged 55 to 59, a TTR strategy may make financial sense, depending on your personal circumstances. If you’re still working aged 55 to 59, you can commence a TTR income stream. Et voilà – your super balance shifts to a tax free income stream!

However, there are important catches. One is that you have to draw at least 4 per cent of your super balance (up to a maximum of 10 per cent) annually. Another is that your income stream becomes taxable at your marginal tax rate, less an attractive 15 per cent offset.

If the estimated tax saved on your super earnings is greater than the tax paid on the income stream after the tax offset, then a TTR strategy can be effective.

If you’re not turning 55 until 2015 (up to 2025) and you’re sensibly planning ahead, the opportunity to take advantage of this strategy up to age 59 is complicated by your ‘preservation age’. If this applies to you, I recommend you seek independent professional advice.

If you commence a TTR income stream while still working, retain a super accumulation account to accept your super guarantee and any salary sacrifice contributions you make. You can ‘re-set’ your TTR each year (combine the income stream and accu- Asset Value Yield Income Cash $50,000 3.9% $1,950 Shares $450,000 5.0% $22,500 Property $500,000 4.8% $23,750 Total $1,000,000 4.8% $48,200 Tax @ 15% $7,230 mulation balance) to optimise its tax effectiveness.

If you’re 55 to 59 and retired, commence an account based income stream rather than a TTR income stream.

Aged 60-64 – stop paying too much tax!

For those aged 60 to 64 and still working, a TTR strategy can become a ‘no-brainer’. You can shift your super to an income stream ensuring your super earnings are tax free while at the same time draw your income stream tax free from super. It’s the best of both worlds! If you fall into this age range and you’re not undertaking this strategy, on the downside you’re likely paying too much tax; on the upside Mr Hockey will be forever grateful (your family, not so much).

For those who are 59, depending on when your birthday falls, with a little planning you may also be able to take advantage of this same strategy (seek advice before doing so).

TTR and salary sacrifice – save even more tax! Those aged 55 to 64 can use a salary sacrificing strategy in clever combination with a TTR strategy to further save tax, boost your family’s retirement savings and maintain your family’s cashflow.

Get cracking today

When considering these strategies, don’t lose sight of your exciting end goal – to fund your family’s lifestyle in retirement. Start planning the transition to your dream retirement today.



Independent financial planner Tim Mackay

Tim Mackay BEc (Hons) MBA CA CFP SSA
I am an independent financial planner, SMSF expert and company director. I thrive on providing independent, expert financial advice to my wonderful clients. With international investment banking experience at Deutsche Bank and UBS in London and New York, I was recognised as SMSF Advisor of the Year by Independent Financial Advisor Magazine.

To contact me, speak to my team on 02 8084 0453. Please feel free to connect with me on Twitter. You can also visit the my colleague’s (and sisters) website.