Phase into retirement

Robin is one such person who wants to wind back her working hours gradually. At 59, she’s keen to spend time with her first grandchild, but isn’t quite ready to retire just yet. Not only does she think she still has a lot to contribute, but she’d like to maintain the social interaction and mental stimulation she gets from work. With this in mind, she decides to cut back to three days (24 hours) a week.

She meets with a financial adviser to make sure she can maintain her current lifestyle, while structuring her salary in the most tax-effective way possible.

After scaling back her working hours, Robin’s salary drops from $100,000 to $60,000. Her adviser suggests setting up a Transition to Retirement Pension (TRP) as the income from this will replace her pay cut of $40,000. This means she can maintain her after-tax income. A TRP is available for people aged 55 and over, and allows Robin to:

• invest some of her super in a TRP, and
• use the regular payments from the TRP to replace the income she misses out on when moving to part-time work.

If you’re 55 or over, there’s a way you can maintain your lifestyle while working fewer hours.

What is 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.

By implementing this strategy, Robin can:

• access her super before retirement
• reduce her hours without reducing her income, and
• replace her salary with a tax-effective income stream.

Robin’s TRP will provide her with an income each year, allowing her to maintain her current living standard. There are minimum and maximum income thresholds she needs to consider though, such as only being able to access up to 10% of her account balance each year. For this reason, it’s important to make sure she puts an appropriate amount of super into her TRP.

The good news is Robin will pay less tax on the income payments from her TRP than she does on her salary.

As a result, she won’t need to draw down her full pay cut from the TRP. In fact, a pre-tax income of $31,854 will cover her salary reduction of $40,000.

What’s more, when she turns 60 next year the income stream payments will be completely tax-free², meaning a TRP payment of $25,500 will cover Robin’s $40,000 pay cut.

2. Assumes the income stream is commenced from a taxed super fund.

• It can be tempting to focus on the short term and maintain your current lifestyle when you’re working part-time. But be careful you don’t draw down your super too quickly and fall short of income during retirement as a result. Your adviser can help you determine your expected length of retirement and the income you’ll need each year, so your super lasts as long as you need it to.
  
  For an idea of how you’re tracking with your retirement savings, visit mlc.com.au/supercalc.
  
  
• Once you purchase a TRP, you can transfer the money back to super at any time. This flexibility is a great option if you think you might return to full-time work at any point. However, a TRP can still be a smart strategy when you’re working full-time and want to boost your retirement income. Read Craig’s story here.
  
  
• Some super funds have a minimum account balance, so it’s important to check if yours has a limit before you start a TRP.
  
  
• A TRP isn’t always the most effective strategy. If you have investments outside super, you may actually be better off keeping your super as is and using your other assets to supplement your income. Your adviser can help you choose the best option for your situation.