Transition to Retirement

Individuals who are 55 and over can start an account based pension but are restricted by the amount of income they can draw each financial year (no more than 10% of the balance). This type of pension is also known as a pre-retirement pension.

For individuals who are aged 55 to 59, the income from an account based pension may be taxable but this is dependent on the taxation components within the account based pension. If a portion of the components is tax free then a portion of the income is tax free. Similarly, if a portion is taxable then a portion of the income is taxable.

On the taxable portion, there is a 15% tax offset that can assist to reduce any income taxation payable. The combination of the tax free income and the tax offset make an account based pension very tax effective.

If the individuals also salary sacrifice part of their gross income to superannuation, those individuals can reduce their income taxation and maximise their superannuation prior to their full retirement.

The swapping of taxable income with non-taxable income is called a ‘transition to retirement’ strategy.

An additional benefit is that the earnings on an account based pension are tax free whereas superannuation earnings are taxed at a maximum of 15%. So an individual can also maximise their after tax earnings where they transfer the bulk of their superannuation to an account based pension.

If you are between 54 and 65, Wealthwise can help you develop the best Transition to Retirement strategy for your own personal situation.