What does it all mean?
Today I’m going to talk about super at different life stages, and more specifically the transition to retirement – what it is and how it’s taxed.
Accumulation fund is what it sounds like. It describes your superannuation when it is accumulating money – when your employer is contributing to it, or you are contributing to it. When a fund is in accumulation phase, it’s growing through contributions, it’s growing through income.
In the accumulation phase, you’ll pay 15% tax on contributions that are concessional. You won’t pay any tax on any non-concessional contributions because nobody has claimed those as a tax deduction. You’ll also pay 15% on the earnings that the fund makes.
The next phase is pension phase. This is when you’ve gone from accumulating money to actually drawing down or getting paid out of your superannuation. Generally speaking, your fund can’t be doing both. You can’t be in pension phase and accumulation phase.
You can potentially still be collecting contributions if you’re still working and drawing down a pension. But they will be two separate funds within one.
With your super fund in pension phase, all the earnings are staying inside that superannuation fund. You’re not losing any of it to the Tax Office. And that’s because the idea now is that your fund should be looking after your retirement and giving you an income in retirement.
What is a Transition to Retirement (TTR)?
This is probably one of the most confusing aspects of super.
Transition to retirement is where you have generally (and I say generally because it’s not always the case) cut back your working days, but because you are only in early-stage retirement (and still young!) your cost of living is still high.
You’ve finished work and you want to do all those things that you couldn’t do when you were working. Travel, dinners out, weekends away etc. However, you’ve gone from earning a full-time wage to now only a part-time wage or a pension.
So, the government came up with a solution to encourage people to move into part-time work, instead of going from full-time straight into a pension. It’s called – you guessed it – a Transition to Retirement.
Under the old rules you, if you were still working, you would have to be 65 to start receiving a pension from your super fund. If you were say 60 and you wanted to start to get your pension out of your Superfund, you actually had to finish work and retire. So, it wasn’t an option for people to move to three-days-a-week or two-days-a-week and get their pension to supplement their income until they were 65.
So, the government bought in this Transition to Retirement scheme. What that allows you to do is to continue working up to the age of 65, but still collect some pension.
People can now earn two or three days of wages, and then top it up to the five days with their pension payment.
In this scenario your superannuation splits into part accumulation (where your employer is still putting in the contribution because you’re still working three days a week) and part pension – where it would start to pay you what you need to supplement your income.
That pension payment will form part of your taxable income until you reach the age of 60, and then it is tax-free.
It’s really important that you understand the implications of pulling money out before your retirement. You really should only pull out what you need to so that your fund keeps earning income and can grow as much as possible.
That’s all for my super series. I hope that this has been valuable. Please reach out to me if there’s anything that you think I haven’t covered off and you want me to do a quick video, I am more than happy to do that for you because of course, if you have those questions, somebody else may too.