THE ROAD TO RETIREMENT
Janet Balding The Australian Taxation Reporter
In the recent Federal Budget, the Government announced that the Age Pension age will gradually be increased to 70. What does this mean for your retirement? Do you have to keep working until 70?
BACKGROUND
To contain the spiralling cost of the Age Pension, in the Budget the Government announced that it would increase the age that you can access this pension to 70 by 1 July 2035. This builds on the former Government’s reform which increased the pension age to 67 by 1 July 2023. With these two changes added together, the following table illustrates exactly when you will qualify for the Age Pension, depending on when you were born:
IMPACT
From the above table, we can see that only those born after 1965 will have to wait until they are 70 to access the Age Pension. If you were born before this date, the age is less than 70. If you were born before 1952, the age qualification is unchanged from the long-standing 65 years. Even for those who are born after 1965, contrary to media reports, the changes made in the Budget do not necessarily mean you need to work until you are 70. This is only the Age Pension access age! The superannuation preservation rules provide ample flexibility and several options for you to plan your retirement & finish work as early as 55 years of age if you wish.
OPTION 1 – STOP WORK AT 55
If you have reached preservation age* but are less than 60, then you are considered retired & can therefore access your superannuation savings if:
- An arrangement under which you were gainfully employed has ended (i.e. you finish up at your current job), and
- Your superannuation fund trustee is reasonably satisfied that you never again intend to become employed either part-time (10 hours per week) or full-time. Where you do return to work, no penalties apply – provided that the trustee was satisfied at the time that you originally applied for your savings that you would not return to work.
*preservation age depends upon your birth date, and increases the younger you are:
Therefore, under this option, you can stop working as young as 55 if you wish & commence living off your superannuation savings.
CASE STUDY
Joe was born on 1 January 1960. Having worked his entire life as a labourer, he is looking forward to giving his body a break & exiting the workforce as soon as possible. He consults his financial planner who provides him with the following retirement options:
OPTION A
Because he is born before 1 July 1960, Joe’s preservation age is 55. As soon as he turns 55 (1 January 2015) he can therefore quit his job & provided the trustee of his superannuation fund is reasonably satisfied that he never again intends to return to work, Joe can access his superannuation & live off this for the remainder of his life.
However, by accessing his superannuation before 60, Joe will pay tax on the amounts withdrawn (no tax is payable for amounts withdrawn once you turn 60). Concessional tax rates apply to superannuation withdrawn between the age of 55 to 60.
OPTION B
Joe can quit work at 55 and, if he has low or insufficient levels of superannuation savings, live off his superannuation until he is old enough to access the Age Pension or Part Age Pension. As he is born between 1 January 1960 to 30 June 1961, he will qualify for the Age Pension when he is 68.
Note: Under both of these scenarios, Joe is free to return to work & will not be penalised provided at the time he retired his superannuation fund was satisfied that he never intended to return to work in the future.
CHANGES AFOOT?
Note there has been recent speculation that there are moves afoot to align the preservation age (i.e. the minimum age you can access your superannuation savings with the Age Pension Age). Indeed, appearing on ABC’s Q&A program, the Treasurer Joe Hockey confirmed that a change to the “preservation age” may be entertained in the near future: “It is on my mind & the Prime Minister’s mind, we are thinking about the quality of life for Australians into the future is sustainable,” he said. “I suspect it will be in this term because I think what we’re trying to do is give people a long lead time, a long lead time”, he said.
However, the very next day the Prime Minister ruled out this possibility, repeating his Election pledge that there will be no new adverse changes to superannuation in his Government’s first term. For it’s part, the Opposition has strongly ruled out any chance of increasing the preservation age, describing any plan to do so by the current Government as “a breathtaking act of arrogance”.
Even if changes were to be made in the future, which on current indications seems unlikely, as with the Age Pension changes it is likely they would be slowly phased in & would not impact on the retirement planning of those presently approaching retirement.
OPTION 2 – START WINDING DOWN AT 55
Under this strategy (known as a transition to retirement (TTR) pension) once you’ve reached preservation age (currently 55) you can commence drawing a pension from your superannuation fund which can then be used to supplement your employment income. The rules are as follows:
- You must have reached your preservation age (currently 55)
- You can only take an income stream from your superannuation account generally by way of an account-based pension. These pensions require a minimum percentage amount be paid to you each year
- No lump sum withdrawals are allowable until retirement
- There is no work test to be met
- No more than 10% of the account balance at the start of the financial year may be withdrawn each year
- The taxable part of your income stream will be taxed at your marginal tax rate, but if your pension is paid from a taxed source, you will receive a tax offset equal to 15% of the taxable part of the income stream. Once you reach 60 years of age, the income stream is tax-free, and
- Your pension can be rolled back into accumulation mode at any time.
ADVANTAGES – TTR PENSION
- SUPPLEMENT – You can supplement your workforce income by accessing your super benefits early
- TAXATION – Less tax is paid on the pension income, as compared to your employment income
- LIFESTYLE – You can reduce your working hours without sacrificing your way of life
- FLEXIBILITY – The pension can be rolled back into accumulation mode at any time. This provides flexibility for those who wish to return to full-time work & therefore no longer have the need for their pension income.
DISADVANTAGE
On the downside, by drawing on your superannuation earlier than normal, you are depleting your retirement savings which can be detrimental long-term. Also, by accessing your superannuation before turning 60, you will be taxed on your withdrawals (no tax if payable for amounts withdrawn once you turn 60).
OPTION 3 – STOP WORK AT 60
Under this option, if you have reached age 60, you are considered retired & can therefore access your superannuation if an arrangement under which you were gainfully employed has ended & you satisfy either of the following:
- You have attained that age on or before the ending of the employment, or
- The trustee is reasonably satisfied that you never again intend to become employed either part-time or full-time.
TAX TIP
The advantage of working through until you are 60 & accessing your superannuation at this age, is that it is tax-free. By contrast, as we have seen under Option 1 & 2, where you access your superannation between the ages of 55 & 60, tax will be payable on the withdrawals.
OPTION 4 – TURN 65 AND KEEP WORKING
Once you reach 65, you can access your superannuation savings at any time. There are no restrictions – even if you are still working. (Note that it isn’t compulsory to withdraw your benefits merely because you have reached 65 or 60 (or any age). Rather you can leave them inside the concessionally taxed superannuation environment & make withdrawals as & when you require.
TAKE HOME MESSAGE
For those who don’t wish to work into their late 50’s or 60’s, the above strategies provide you with ample flexibility to plan your retirement. You should speak with your financial advisor to discuss which strategy is best for you, as many factors may influence the strategy you ultimately choose including: the current level of your retirement savings; how long you wish to work for; whether you will qualify for the Age Pension; the quality of life you wish to maintain in retirement; and whether you wish to receive your superannuation tax-free (which you can only from the age of 60).
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