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How to make the transition to retirement

April 2021

Article | 6-minute read

Have a plan in place so that when the time comes to retire, it’s as seamless as possible. Here are our tips to help get you there. 

You’ve worked hard. Your kids have grown up and you’re feeling more financially secure. Perhaps it’s time to start thinking about the next chapter of life.

The good news is that when it comes to preparing for retirement, Australia – thanks to our superannuation system – is a great place to be. And if you don’t intend to leave the workforce immediately, you have time to get ready and consider seeking retirement planning advice.

Some of the retirement planning strategies Australia has available, such as transition to retirement pensions and recontribution strategies, deliver the biggest benefits to people who prepare in advance.

When to retire

There are constraints on accessing superannuation and social security benefits, but it’s up to you to decide when you’re ready to retire – both financially and emotionally.

So, how much do you need to retire? The Association of Superannuation Funds of Australia suggests a single homeowner needs an annual income of $44,224 and a couple needs $62,562 a year to live a comfortable retirement lifestyle. But ANZ Financial Adviser, Michelle Li, says each person is unique.

“A better way to answer that question is to go through your budget...Go through transactions on your credit cards and bank accounts to look at basic expenses and one-off costs,” Li says.

From there, you can make adjustments. The cost of commuting to work will no longer be relevant after retirement but expenditure on hobbies and holidays may increase. Also consider expenses that may arise down the track, such as the cost of assisted living or aged care.

Life insurance is another expense to review at this stage, says Li. Insurance premiums become more expensive as you get older, and if the kids are more self-sufficient and debt is under control, the reasons for holding insurance may now be less compelling.

Many people preparing for retirement already own their home outright. Others intend to use their superannuation savings to pay it off, or downsize to retire debt-free.

“It always comes down to: what do you want to protect? You do get additional protection on the insurance side, but the cost does impact your super fund savings,” Li says.

Total and permanent disability and income protection insurance policies typically require people to be working a certain number of hours to qualify for a payout. If you’re considering scaling back on work, it’s essential to understand the implications.

Look to the future

People planning for retirement need a sense of how long their nest egg has to last, says ANZ Senior Financial Adviser, Rebecca Hurford.

“With medical advances, our life expectancy is going to continue rising so we really need to make sure that we’ve got the capacity to continue generating a regular income for decades ahead,” she says.

Beyond the financials, Hurford suggests thinking through what you will do with your time when you’re no longer working. “Picture what those future days are going to look like and what you’d like to achieve,” she says.

You could consider cutting back on work hours to try out the lifestyle before you fully retire.

This provides a more comfortable work-life balance, with the safety net of continuing employment income, and the satisfaction of being actively and socially involved in the workforce.

If you've reached what’s known as your preservation age, you could access some of your superannuation to top up any shortfall in income that might come with reduced work hours, through a transition to retirement (TTR) pension, also called a transition to retirement income stream (TRIS).

The preservation age for people born before July 1, 1960 is 55 years. This increases to 60 years for people born after July 1, 1964. (See table below).

Transition to retirement withdrawal limits

Minimum annual TTR pension withdrawal payments.

Transition to retirement withdrawal limits

Age of pension account holder

Rates reduced by 50% for the 2019–20 and 2020–21 income years (%) due to COVID-19  measures

% of account balance after July 1, 2021

Under 65

2% 

4%

65 to 74

2.5%

5% 

75 to 79

3%

6%

80 to 84 

3.5%

7%

85 to 89

4.5% 

9%

90 to 94

5.5%

11% 

95 and above

7%

14%

Source: ATO

Preservation age based on date of birth

Preservation age based on date of birth

Date of birth

Preservation age (years)

Before 1 July, 1960 

55 

1 July, 1960 – 30 June, 1961 

56 

1 July, 1961 – 30 June, 1962 

57 

1 July, 1962 – 30 June, 1963 

58 

1 July, 1963 – 30 June, 1964 

59 

After 30 June, 1964 

60 

Source: ATO

Transition to retirement withdrawal limits

TTR pensions do come with restrictions. People aged under 65 must withdraw at least 4% of the pension account’s balance each year. That proportion goes up with age (see table).

You cannot draw more than 10% of the account balance each year or make lump sum withdrawals. This restriction disappears after you've met a condition of release, such as turning 65 or declaring full retirement after age 60.

Anyone considering a TTR pension should get retirement planning advice, says Hurford. Not all super funds offer TTR pensions, so it’s essential to check.

People with a self-managed superannuation fund (SMSF) should review their trust deed to determine whether it allows for a TTR pension.

“It’s not mandatory for trust deeds to have that transition to retirement feature written into the deed so they would need to get advice,” Hurford says.

Tax treatment

If you’re between your preservation age and age 60, you will pay tax on the payments you receive from a TTR pension. If you’re over 60, payments from a TTR pension are generally tax-free.

Earnings on assets held in the TTR pension account are taxed at 15% until you turn 65. After that date, earnings are no longer subject to tax.

TTR pensions used to offer more tax advantages but these have been watered down, says Hurford. Still, TTR pensions can be used alongside other retirement planning strategies to potentially reduce tax and boost savings.

A recontribution strategy, for example, involves drawing a TTR pension and salary sacrificing some wages back into the super fund.

Transition to retirement made easy with an ANZ Financial Adviser

Hurford recently helped a client with a TTR pension and recontribution strategy. The 60-year-old client works full time and earns $150,000 a year before tax. He has $900,000 in super and plans to keep working full time until age 70.

The client moved $800,000 of his super to a TTR pension, drawing the legislated minimum income of $32,000 in year one. Because he is 60 years old, the client pays no income tax on the pension payments.

He salary sacrifices part of his employment income to super, topping up the amount his employer contributes in super guarantee payments to the $25,000 annual limit on concessional contributionsdisclaimer. The salary sacrificed amount is taxed at 15% rather the client’s marginal tax rate.

The client saves income tax ($4,193 in the first year alone) and maintains the same level of take-home income. When he retires at age 70, Hurford projects the client will have an extra $57,000 in super as a result of the strategy.

Recontribution strategies can also be used to reduce the tax payable for estate planning purposes if adult children are to inherit superannuation assets, says ANZ Financial Adviser, Zoe Morris.

Couples can use a recontribution strategy to even out the amount that each partner has in their super fund.

“If the partner who is older has more super, by moving it to their partner who has less super, the older partner may be eligible for social security benefits,” Morris says.

Shifting funds between partners can also reduce issues with the transfer balance cap if one member of the couple has in excess of $1.6 milliondisclaimer in their fund. The transfer balance cap restricts the amount you can transfer to the tax-free pension phase of superannuation.

There are many factors to consider when preparing for retirement. Australia has a complex system and it is always helpful to seek personal retirement planning advice.

Financial advisers can work with you to keep growing your wealth by reviewing your existing plan, or tailoring a new one that’s as unique as you. Find out more and book an appointment

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Zoe Morris, Rebecca Hurford, and Michelle Li are ANZ Financial Advisers. ANZ Financial Advisers are representatives of Australia and New Zealand Banking Group Limited ABN 11 005 357 522, holder of an Australian Financial Services licence.

This information is of a general nature and has been prepared without taking account of your personal objectives, financial situation or needs. Before acting on the information, you should consider whether the information is appropriate for you having regard to your objectives, financial situation and needs.

© Australia and New Zealand Banking Group Limited (ANZ) ABN 11 005 357 522.

Note that the concessional contribution limit will increase via indexation to $27,000 a year from 1 July 2021.

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The transfer balance cap is $1.6 million for the 2020-21 financial year and rises via indexation to $1.7 million on 1 July 2021.

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