Saying goodbye to work … slowly

The transition to retirement rules are a great incentive to stay working until you’re really ready to stop.

Summary:  Many Australians enjoy working and hesitate to retire at a predetermined time. The transition to retirement rules provide government incentives to slowly ease out of the workforce. Those who don’t take advantage of these rules may be paying more tax than necessary.

Key take-out:  Workers aged over 60 can draw a tax-free income from their super fund, then salary sacrifice up to $35,000 a year into their super account at a tax rate of 15%. This allows workers to reduce their hours without necessarily reducing their income.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

The idea of turning in your badge at the end of a long career is becoming increasingly unpopular. For some, it’s actually dreaded.

More and more, Australians want to continue working beyond what society deems a respectable age to retire.

Often, it’s not all about earning some extra money – it’s more about identity, friendships and feeling valued.

But there are also great financial reasons to continue working. And if the lifestyle and identity reasons are backed with solid financial reasons, there’s no point riding off into the sunset at a predetermined time.

Believe it or not, the government actually offers a few incentives for you to slowly ease out of the workforce over a five- or 10-year period.

Not only does that keep valuable people in the workforce, but it saves on paying out government age pensions (if you’re earning enough).

Sadly, not enough people know about the rules that make staying in the workforce financially rewarding – outside of the continuing income.

Transitioning out

Rule changes in 2005 provided the perfect financial incentive for Australians to start easing out of the workforce from their late 50s.

These are most commonly called the “transition to retirement” (TTR) rules. Those who don’t know about them, and don’t make them work to their advantage, are literally donating money to the tax office on two levels.

The Howard Government introduced the TTR scheme in order to allow people to slowly remove themselves from the workforce.

Loosely, the TTR rules state that you may take between 4% and 10% of your super fund as a pension, prior to retirement, while continuing to earn an income.

The rules were created to allow people to shift from five days a week to four or three days, without having to take the cut to income that would normally entail.

The idea was that workers could access a pension from their super fund, while still working, and receive tax-incentivised income for doing so.

Then in 2007, former treasurer Peter Costello added a kicker that changed the ball game. Tipped the playing field to a 45 degree angle. And made it a near necessity for anyone over the age of 60 to be on a TTR pension.

For those aged over 60 who draw an income from their pension fund (a super fund becomes a pension fund when you turn on an income stream), the income received from that pension is now tax free.

If workers could receive tax-free income from their super fund, without having to stop work, would they need to earn as much from their day job?

No. So workers could reduce their hours, without necessarily reducing their income.

Super incentives

Further, it doesn’t have to come at the cost of running down super. Why? Because workers in this situation can still contribute to their super.

This year, those aged over 50 can contribute up to $35,000 a year ($30,000 for those aged under 50, but workers in this category are miles off being able to do a TTR).

Yes, add to a TTR the fact that workers can salary sacrifice (paying 15% versus the regular marginal tax rate) and a TTR strategy is an almost certain win for those over 60 who are still working.

So, those aged over 60 can work less, earn a tax-free income from their pension fund and contribute more to their super fund.

An example? Consider a 60-year-old who earns $70,000 and has $200,000 in super. They could turn on a tax-free pension, taking $8,000 to $20,000 (4-10%)

from the pension fund, and recontribute up to $35,000 to super, paying 15% tax instead of 34%. (See a financial adviser to help you work out the numbers best for you in your situation.)

Win. Win. WIN!

Anyone who is not doing that is almost certainly paying more tax than necessary.

And, importantly, the only way to contribute to super after the age of 65 is to continue to work. Anyone over 65 who doesn’t meet the “work test” (working 40 hours in a 30-day period) can’t continue to contribute to super.

A State Super Financial Services survey released recently found about 42% of public sector workers wanted to continue working beyond their retirement date.

If work makes you happy and helps you enjoy life a little more, if there are friendships AND financial incentives, why give up something you love, or ride off into the sunset before you’re ready?


The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au


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  • Professional associations should be responsible for setting continuing professional development standards to help improve adviser standards, the SMSF Professionals' Association of Australia says. This would challenge advisers, encouraging them to see the exercise as more than a compliance requirement, the body says.
  • The ATO has confirmed a rollover/benefit to a SMSF will be treated as a contribution for the purpose of the active member test, special counsel for Townsends Business & Corporate Lawyers Michael Hallinan says. The test is one of three tests used to decide if a super fund had lost its Australian residency status, he says.

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