Attention over 55’s – Same income but more money!!

You are probably sick of hearing about all the changes to superannuation, age pensions and retirement incomes. It all seems complicated, confusing and has little relevance to your situation. However, there is a fairly simple strategy utilising a Transition to Retirement Pension (TRAP) that allows you to receive the same net (after tax) income, pay significantly LESS TAX and put MORE MONEY into your superannuation fund for retirement.

What is a transition to retirement plan (TRAP)?

A Transition to Retirement Pension is a flexible way to move from work to retirement. On reaching your preservation age (currently 55), you can start accessing all your super (including the preserved portion) via a super pension while maintaining or reducing your working hours – you don’t have to retire permanently. Importantly, this increased flexibility lets you re-organise your finances, to maximise income and super contributions and SAVE TAX.

With a TRAP you receive a regular pension and your investment earnings and capital gains on the assets used to fund a TRAP are effectively TAX FREE. Indeed, TRAPs are a popular way to unlock preserved super and supplement the reduction in salary that comes with winding back your working hours.

So how does it work?

Let’s look at Joe (our case study) a professional, 61 years of age. With the use of a TRAP (see table below) Joe can reduce his salary to $28,000 by salary sacrificing $52,000 ($44,200 after 15% tax) to super. To supplement his salary, Joe commences a TRAP drawing down from his $350,000 super balance, taking a super pension of $35,000 per annum.

As Joe is over 60 years of age, only his salary is taxed at his marginal rate, with his Pension being Tax Free (if Joe was aged between 55 and 60 his super pension would be taxable, however he would be entitled to a 15% rebate). Therefore, under the TRAP, Joe’s after tax cash income remains about the same, at $59,280.

The TRAP strategy is very effective at growing your super. This is because of two factors. Firstly, by Joe salary sacrificing $44,200 (after 15% tax) to super and only drawing a pension of $35,000 via a TRAP, he is saving $9,200. Secondly, using a TRAP means Joe pays no tax on any earnings made on funds used to establish the TRAP. Based on Joe’s opening super balance of $350,000, with a growth rate of 7.5 per cent p.a. ($26,250 per year) this represents a further tax saving of $3,937 annually. (Further tax savings could occur if Joe required less income to live on.) That is a total benefit of $13,137 in the first year alone, which over ten years will make a big difference in Joe’s retirement.

Make sure you seek advice

Strategies using a TRAP won’t suit everyone and some Super Funds don’t even offer them. Our simple case study is only a general example to show the potential benefits from this strategy. If you would like to know more about how a TRAP may be of benefit to you, please contact Tony Rimac, whom is the Manager of PT Wealth Solutions Pty Ltd, a corporate authorised representative of PATRON Financial Advice (AFSL 307 379).

PT Wealth Solutions Pty Ltd has prepared this information for general information only. The information does not take into account your personal objectives, financial situation or needs. Therefore, you should not act on this information if you have not considered the appropriateness of this information to your personal objectives, financial situation and needs. You should consult a licensed or appropriately authorised financial adviser before making any investment decision.