Are you thinking about retiring but not quite ready to give up work?
A transition to retirement pension (TRP) allows you to draw an income from your superannuation while you’re still working. That means you can cut back on your working hours while maintaining your income. It also offers potential tax benefits.
If you have reached your preservation age and are still working a TRP offers flexibility. It can help you structure your working life and income to suit your needs. Here’s how.
Using TRP to reduce work hours
If you want to reduce your work hours as you approach retirement, a TRP pension can be used to top up your income via your superannuation.
Here’s how it might work.
Dan is 62 and wants to reduce his working hours from 5 days to 4. His employer agrees, and Dan goes down to 4 days a week. To help offset his reduced income he draws money from his super. Because Dan has already turned 60 years of age the money he receives from his super is tax free.
This allows him to start drawing down part of his super before he’s retired and enables him to gradually scale back his work hours while maintaining a similar income.
Using TRP to save on tax
You can also use a TRP to grow your super and pay less tax in the lead-up to retirement.
Here’s how it might work.
Vanessa is 63 and intends to keep working for another few years. She salary sacrifices part of her income, these amounts are taxed at 15% (which is lower than her regular, marginal tax rate). To make up for the money she salary sacrifices into her super she commences a TRP to draw money from her superannuation (which is tax free as she’s already turned 60).
While the specific circumstances will vary from person to person, a TRP can enable a person to grow their super whilst maintaining their income.
Starting a TRP
While a TRP has a number of potential benefits, it’s also a complicated financial tool, and we strongly recommend seeking professional financial advice beforehand.
A financial planner can help you calculate the potential cost / benefit analysis of a TRP, and how it may impact both your current income and future superannuation balance. There are also specific rules around tax, draw down rates, and age which a planner can assist with.
You can find additional details in our TRP quick guide – available to download here.
