Working toward retirement in a more tax efficient way

from Australian Super

4 December 2009

A recent survey of 600 employees conducted by outsourcing consultants on retirement plans found that nearly half of those surveyed plan to progressively decrease the hours they work as they approach retirement, rather than retiring suddenly.

Among 55 to 59 year olds, two out of three plan to scale back their working hours by 2014 and among those aged over sixty the figure nearly increases to three in four. These people will be transitioning toward retirement.

Scaling back hours worked also means reducing cash in hand, but if you are over 55 years of age you can continue to work, sacrifice some of your pay into super, and in the process pay less tax and top up the reduced pay with a part retirement pension paid while you are still working.  The aim is to give older employees an incentive to continue working beyond 55 years of age.

How do you transition?

Once you earn more than $34,000 a year, your marginal rate of tax rises from 15 cents in the dollar to thirty cents.  Let’s say you are a bus driver or transport operator earning $45,000 a year, you are over 55 and want to pay less tax. You could opt to sacrifice $11,000 into super and pay 15% contributions tax on that amount, the same tax rate you pay on the first $34,000 of your pay.

Your tax bill on that $11,000 if it were cash in hand would be $3,300 on top of the $4,200 tax payable on $34,000, or a total of $7,500.

Salary sacrifice reduces the tax on $11,000 of your pay over $34,000 to $1,650, and saves you an equivalent amount.

The $11,000 that goes into your accumulating super account continues to earn investment returns concessionally taxed and the benefit comes out tax free when it is withdrawn after you turn sixty. Tax may apply if withdrawn before turning age sixty.

If $34,000 is not enough money to pay for your living costs, you can draw down an amount from a transitional retirement pension account to top up your post sacrificed wage.  A 15% tax is payable on this drawdown, if you are between 55 and sixty, but that tax is rebated under our tax laws.

To use this strategy you need to have two super accounts: a transition to retirement pension account from which you draw down at least 2 per cent of the balance each year which is bought with your super, and a separate accumulating super account to which you continue to contribute because no new contributions can be made into a pension account.

The accumulating super can be converted to a pension account at retirement.

While you can salary sacrifice into super at any time before age 55 and lower your tax bill, under current laws you cannot draw down money from super except in exceptional circumstances until you reach 55.

At age 60, the strategy becomes even more tax efficient, because the money drawn down from your pension account is tax free; you don’t even have to wait for a rebate of the tax.

Salary sacrificing is not tax efficient if you are earning less than $34,000 a year because you won’t save any tax.

For more information about transition to retirement options call AustralianSuper on 1300 300 273 or visit our website: www.AustralianSuper.com

This document is of a general nature and does not take into account your personal objectives, situation or needs. Before making a decision about AustralianSuper, consider your financial requirements and read our Product Disclosure Statement, available at www.australiansuper.com/FormsPublications or by calling 1300 300 273. AustralianSuper Pty Ltd ABN 94 006 457 987 AFSL 233788,  Trustee of AustralianSuper ABN 65 714 394 898.  ‘Industry Superfund’ logo used with permission of Industry Fund Services (IFS).  This consent had not been withdrawn at the date of publication.