Ask the Skilled: Transition to retirement – when it’s best to do it and what works finest

Query 1

  • I learn your publish about not having the ability to contribute to superannuation after age 75. Why would you need to? I don’t perceive what advantages if any superannuation gives.

Superannuation is extremely tax efficient. That’s why there are caps and age restrictions on getting cash into it.

There may be additionally a cap on how a lot you’ll be able to have in a superannuation pension/revenue stream, which is growing to $1,900,000 from 2023-24.

Earnings inside tremendous are concessionally taxed and as soon as you change the funds to a pension then all earnings and funds are tax free.

For instance, let’s say you earn revenue from wage and non-super investments of $100,000.

You’d solely get to maintain about $75,000 of that, as $25,000 can be payable in revenue tax. Whereas should you obtained $100,000 out of your tremendous pension, you get to maintain the whole thing, no tax!

There have been some latest studies round the truth that the tremendous tax concessions are too beneficiant and could also be wound again as they’re costing the federal government some huge cash.

The federal government is at present attempting to legislate the ‘goal’ of tremendous. In different phrases, what’s tremendous for?

You’ll word (see beneath) that a part of the proposed goal consists of ‘equitable and sustainable’, which might be learn ‘not too many tax advantages for these that may deal with themselves with out extra tax breaks’.

The opposite concern is that it could improve inequality.

Some wealthier people don’t want the revenue from tremendous, in order that they use it as a low-tax property planning device with a purpose to go on the advantages to their youngsters. That’s the reason ‘ship revenue’ can also be included within the proposal.

Therefore, there are many advantages in placing cash into tremendous.

The onerous half is getting the cash into tremendous first. That’s why common small contributions out of your employer over many years works effectively for most individuals.

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Query 2

  • I’ve $1.2 million in tremendous, am 60 years previous, and have a mortgage of $300,000. I’m nonetheless working full time however contemplating taking a flexi-pension for the subsequent 2.5 years in order that I can repay my mortgage underneath the transition to retirement choice in three hits (one now, one in July, and a 3rd in July 2024). Are you able to inform me what the professionals and cons are?

Sure, you can begin a ‘transition to retirement’ pension as soon as you’re preservation age, which is transferring to age 60 for everybody.

With a transition to retirement pension you’ll be able to withdraw between 4 per cent and 10 per cent of your account stability every monetary yr. So, you possibly can draw 10 per cent earlier than the tip of this monetary yr of about $120,000 (10 per cent of $1.2 million). Then, as you mentioned, make additional withdrawals in July 2023 and July 2024.

The primary benefit, after all, is that you should have paid out your mortgage. And all funds made out of your tremendous after age 60 are tax free.

As rates of interest rise this turns into extra of a bonus. You’re principally getting a assured return of no matter your mortgage rate of interest is. Presently that might be wherever between 5.5 per cent and seven.5 per cent each year, relying in your lender and set-up.

The draw back is that you can be depleting your tremendous and have much less for retirement.

Whether or not the technique is perfect will depend upon whether or not your tremendous achieves a greater return than your mortgage over the subsequent 2.5 years. Nobody can reliably predict that end result.

If you happen to do determine to go forward together with your transition to retirement technique, one factor I might advocate is that as quickly as you will have the mortgage paid out, begin re-contributing to tremendous to construct your stability again up.

House mortgage repayments are a good way to pressure financial savings, particularly for individuals who would in any other case not save.  Due to this fact, hold that financial savings behavior going by contributing to tremendous when you don’t have that debt.

Query 3

  • I don’t personal a home, however at present lease and stay on the age pension with no different revenue. I’m attributable to inherit fairly a big sum (sufficient to purchase a really good home), and need to know if I spend that cash on a home to stay in, will it have an effect on my pension? 

There are a lot of Centrelink, tax, aged care and different insurance policies which favour residence proprietor over non-home house owners.

If you buy a house, then the worth of your house won’t be counted underneath the belongings or revenue check, and therefore not have an effect on your age pension.

Whereas it’s true non-home house owners can have somewhat extra in belongings earlier than their pension is affected (about $225,000) the typical residence is clearly valued at means past this.

Nevertheless, spending all your cash on a big costly residence simply to get a full age pension isn’t what I might advocate.

You need to take into account looking for monetary recommendation over your inheritance to consider your actual state of affairs.

Craig Sankey is a licensed monetary adviser and head of Technical Providers & Recommendation Enablement at Business Fund Providers

Disclaimer: The responses offered are basic in nature, and whereas they’re prompted by the questions requested, they’ve been ready with out bearing in mind all of your aims, monetary state of affairs or wants.

Earlier than counting on any of the knowledge, please make sure that you take into account the appropriateness of the knowledge in your aims, monetary state of affairs or wants. To the extent that it’s permitted by regulation, no duty for errors or omissions is accepted by IFS and its representatives.

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