It's good to be 60
The new superannuation rules will mean your super is tax-free when you retire after your 60th birthday. The rules are also good news if you work past age 60.
A popular strategy to boost your super as you near retirement has been to start a special type of pension from your super and at the same time salary sacrifice from your pay so your disposable income stays the same. The 'transition to retirement' strategy works because the pension income is taxed concessionally and your salary sacrifice contributions are only taxed at 15%.
The strategy is more effective since the 1 July 2007 changes, especially once you reach age 60. Here’s an example of how it works:
Robert is aged 59 and Maria is age 60. They both earn $120,000 and have an after-tax income of $83,100. They both have $450,000 in superannuation and can start a 'pre-retirement pension' because they are over age 55.
The maximum payable per year from the pension is 10% or $45,000.
|
|
Before |
Robert after using the strategy |
Maria after using the strategy |
|
Age |
|
59 |
60 |
|
Salary |
$120,000 |
$120,000 |
$120,000 |
|
Salary sacrifice |
$0 |
$56,539 |
$72,263 |
|
Pension |
$0 |
$45,000 |
$45,000 |
|
Tax and Medicare |
$35,100 |
$25,361 |
$9,637 |
|
After tax income |
$83,100 |
$83,100 |
$83,100 |
|
Extra into super |
|
$3,058 |
$16,424 |
In Robert's case, he salary sacrifices $56,539 and loses only 15% tax in super so he has $48,058 going in. His pension of $45,000 is taxed but he qualifies for a 15% rebate so he pays less personal tax overall. The difference between what he is putting into super and what he is taking out is just over $3,000.
For Maria, the pension income is not taxed at all because she is age 60. This means she can salary sacrifice even more and still have the same after-tax income. The difference between what she is putting into super and what she is taking out is almost $16,500. Over five years at 8% pa she would have an extra $96,350 in her super fund.
To put the strategy in place requires careful planning. For instance:
- A 'pre-retirement pension' can only pay an income and you cannot make withdrawals from the capital.
- The Tax Office sets rules for an effective salary sacrifice arrangement.
- There are limits on how much you can salary sacrifice tax effectively.
- Investing to support a pension may be different to your current super investments.
Your financial planner can help tailor the strategy to meet your needs.