Grow your super without reducing your income

However, Craig wants to make sure he’ll have enough to maintain his current lifestyle when he stops working. He wants to be able to help his kids with house deposits and wedding costs, and ensure a comfortable retirement for him and his wife. As he plans to retire at age 65, he needs to make the most of his income ($90,000) while he can.

His friends have also told him he can start using pension benefits from age 55, and Craig would like to find out more. So, he makes an appointment with a financial adviser to see if there are some safe strategies that could help him save more for retirement.

Craig’s financial adviser listens to what he wants to achieve, as well as his concerns about not taking too many risks with his savings. She suggests establishing a Transition to Retirement Pension (TRP), which suits Craig’s conservative approach.

Available for people aged 55 and over, the TRP allows Craig to maintain his current income and save more for his retirement by:

• contributing part of his pre-tax salary directly into super (known as salary sacrifice)
• investing his super in a TRP, and
• using the regular payments from the TRP to replace the income he contributes to super.

If you’re 55 or over, there’s a way you can grow your super faster while maintaining your current income.

What’s a TRP?

A Transition to Retirement Pension is a special type of income stream that lets you access your super benefits before you retire. You can do this when you reach your ‘preservation age’. This varies depending on your date of birth, but if you were born before 1 July 1960, your preservation age is 55.

It’s important to note that limits apply to the amount of income you can receive each year and you can only make lump sum withdrawals in certain circumstances.

This strategy allows Craig to save tax in a number of different ways. For example, earnings in a TRP are tax-free, compared to a tax rate of 15% in super. So, by applying this strategy Craig can:

• save more tax-effectively
• add thousands to his retirement nest egg without reducing his income, and
• make his super last an extra four years. This is based on an annual after-tax income of $64,278 throughout his retirement.

Craig earns a pre-tax salary of $90,000 and salary sacrifices $4,500 each year, which leaves him with an after-tax income of $64,278. After speaking with his adviser, he reduces his pre-tax salary in the first year to $48,288 pa. He also sacrifices $41,712 pa into his super fund to build his retirement savings faster.

To receive the same after-tax income of approximately $64,278 pa, he starts a TRP and chooses to receive taxable income payments of $30,000 in the first year.

Because of the significant tax savings available with this strategy, Craig can invest more in super.

What’s more, when he turns 60 he won’t have to pay tax on the income he receives from his TRP. This means he won't use as much TRP income, leaving more money to see him through his retirement.

There are minimum and maximum income thresholds he needs to consider though, such as only being able to access up to 10% of his TRP account balance each year. For this reason, it’s important he makes sure he puts an appropriate amount of super into his TRP.

If we assume he invests his full $300,000 super balance in a TRP, the following table shows the value of this strategy after one, five and 10 years.

Value added by strategy over 10 years = $100,373

Assumptions: Both the super and the TRP investment earn a total pre-tax return of 8% pa (split 3.5% income and 4.5% growth). The overall franking level on investment income is 30%. Salary doesn’t change over the 10-year period and he continues to receive 9% Superannuation Guarantee based on his package of $90,000, even after he sacrifices into his super fund. Craig receives a tax-free income from the TRP from age 60. Both the super and the TRP investment values are after capital gains tax (including discounting). Craig salary sacrifices up to the applicable contribution cap each year (see Tips and Traps).

• Craig’s a disciplined saver, and thinks he and his wife can get by on less than his current salary. His adviser shows him by withdrawing $100 less from his TRP each week, he’ll earn an additional $83,807 for his retirement over 10 years. This is on top of the $101,373 he’s already saved, making him $185,180 better off. An adviser can show you how you can turn your excess cashflow into significant retirement savings.
• If you’re aged 50 or over, salary sacrifice (and other concessional) super contributions are subject to a cap of $50,000 pa until 30 June 2012. After this point, the cap reduces to $25,000.
• A TRP isn’t always the most effective strategy. Talk to your financial adviser to find out which strategies are right for you.
• You can use a TRP to top up your salary when moving to part-time work. Read Robin’s story to see how this works.