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Living longer, working longer Posted on October 9, 2018
Thanks to our nation’s ageing population and our modern-day tendency towards longevity, we have to at least consider working until later in life. Add to that the Federal Government’s raising of the Age Pension eligibility (dependent on legislation) from age 65 to 70 by 2035, and hints at a rise in the age at which workers will be able to access their super, and you have an environment in which working longer will be the norm, rather than the exception.
For those currently in the workplace this news carries with it a raft of practical questions, many of which revolve around the possible effects a longer working life might have on one’s superannuation and tax levels.
While there can be numerous benefits to working longer, including lifestyle, social interaction and self-esteem, in this story we are going to look into the financial side of a delayed retirement.
One strategy that is becoming more popular, in relation to working longer, is known as ‘Transition to Retirement’ (TTR). It involves a carefully planned mix of superannuation income and salary to preserve current earning capacity but to maximise tax effectiveness.
A case study1 developed by ASIC’s MoneySmart, for example, sees a 55-year-old earning $100,000 annually electing to continue to work. He has $220,000 in super and moves most of this to an account-based pension. He also salary sacrifices more than $20,000 annually, but replaces this portion of his regular after-tax salary with income from his account-based pension. So his take-home income remains the same, but he saves $2,300 in tax in the first year whilst boosting his super savings. He will continue to save similar amounts in tax in following years.
Once again, such a strategy must be carefully planned and considered. It is necessary to leave an amount in the superannuation account to simply keep it open. Likely returns should be weighed up and maximum concessional contributions must be respected.
The TTR strategy, put simply, involves continuing to work whilst drawing down some of your superannuation benefits. It can be put into effect once a person reaches preservation age.
“If you are under age 65 and still working, you can transfer some of your super to a super pension and withdraw between 4% and 10% of your pension account balance each financial year. You cannot withdraw money as a lump sum,” the ASIC MoneySmart website says.
This strategy can also be implemented as a person cuts back on their hours worked, allowing individuals to stay in the workforce for longer but perhaps on a part-time basis. It ticks several boxes, including keeping talent in the workforce, helping people to ease into retirement, boosting superannuation savings and paying less tax. Essentially it rewards people for staying in the workforce longer, and for many this is a welcome result.
As with everything financial, TTR does not come without risks and considerations. It will only work with specific retirement strategies (if your goal is to be sailing around the world on your 56th birthday then TTR is not likely for you!). It requires a certain type of superannuation fund – accumulation, not defined benefit – for TTR pensions to be allowed. There can be social security and other tax implications, and of course you may be able to afford to salary sacrifice the maximum concessional amount into super without even needing to replace that income as you approach retirement.
Whatever you choose, there are options that can offer advantages when it comes to staying longer in the workforce. More people than ever are realising that you don’t have to accept that gold watch when you turn 55.
If you would like to know more, click here to speak to a financial adviser. We can give you more detailed information on the best approach for your situation.