Sacrificing part of one's salary into superannuation is a very useful way to save tax and build retirement benefits, as discussed last week.
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For older workers this can be extended into a 'transition-to-retirement' strategy by setting up a pre-retirement pension concurrently.
Any worker aged at least 58 can start a pre-retirement pension. For those aged 60 or more the pension income is tax free.
Tax free income is a scare commodity. For people aged 58 and 59 the income is concessionally taxed (their marginal rate minus 15 per cent).
However pre-retirement pensions aren't as tax-free as they used to be.
Previously the earnings in all pension accounts were entirely tax free but now pre-retirement pension fund earnings are taxed 15 per cent, paid by the trustee.
People aged 58 and 59 may conclude it is best to wait until 60 to start a 'transition-to-retirement' plan due to the new fund earnings tax and the tax on the payments coming to them.
Only those with a strong need for the extra cashflow would find it worth starting earlier.
Everyone under 65 is entitled to $25,000 of tax-deductible super contributions each year. Amounts over the employer contributions up to the limit can be put in by salary sacrifice or personally.
Salary sacrifice contributions are made from pre-tax pay.
A tax deduction can be claimed for personal contributions.
Older workers should try to contribute as close to the maximum as possible. A pre-retirement pension can provide the extra cashflow needed.
People who might want to start a pre-retirement pension as soon as age-eligible would include those with substantial mortgages or other debts still to be paid off.
From age 60 pre-retirement pensions are more attractive due to the tax-free income they pay.
- Money Matters columnist Russell Tym
The extra payments can go straight to the mortgage.
From age 60 pre-retirement pensions are more attractive due to the tax-free income they pay, even if tax must be paid within the fund like a super accumulation account.
Pension payments can be used to sacrifice salary up to the maximum, reduce debts, or meet other needs.
Any worker who has changed jobs after 60 and those over 65 are in the best position as they are entitled to fully tax-free pensions.
If a worker has a high enough income that they can maximise their salary sacrifice contributions without cashflow from a pre-retirement pension it may be best not to start one.
Not doing so allows the super account to build up without drawings.
Transition-to-retirement used to be attractive for most workers age-eligible to set it up. Now the rules are more complex. Its suitability depends on personal circumstances.
For some it is still very attractive. Professional advice can help.
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