Summary: When retirement is approaching, it’s time to act on your super. Consider increasing super contributions and look at where your assets are invested. It’s worth staying in the workforce, at least part-time, to stay active and build your super balance. Start planning for the age pension, and consider if it’s worth prioritising super over the mortgage.
Key take-out: If you’re over 60 and still working, starting a transition to retirement pension is a financial must to maximise your super and minimise your tax.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.
There is a fuzzy point in your life when the retirement you have been working towards suddenly starts charging at you.
It’s fuzzy because it’s going to be a different age for everyone. For most, it will happen somewhere in your 50s. But it could happen from your late 40s, or might not materialise until you’re into your 60s.
From around age 50, you start to care about your super, which miraculously flowered into a reasonable wad of money a few years back.
If you had kids late, like I did, your 50s might still be predominantly about paying private school fees.
But when it hits you, you’ve got to act. Here are six things to do.
1. Ramp up super contributions
Little will have a better impact on your retirement than having more money in super.
If the kids are off your hands and your mortgage is relatively minimal or gone, maximising your super contributions is a near necessity while you’re still working.
Super contributions are taxed at a maximum of 15%, while you’re under the concessional contributions limits. For those over 50, the limit is $35,000 a year. For most, that is a saving on the 34.5%, 39% or 49% they are paying as their marginal tax rates.
The tax saving gets to stay in super, earning more (most of the time) and being taxed less on those earnings.
2. Look at your investment assets
What are your super and non-super funds invested in? Do you have the right amount invested in the growth assets of shares and property?
Classical investment theory suggests you should subtract your age from 100 and have that percentage invested in shares and property (e.g. if you’re 55, then 45% should be in growth assets).
But life expectancies are growing each year. Men are now expected to hit about 80 and women nearly 84. Arguably, this theory needs revision. Perhaps we should be subtracting our age from 110 or even 120. Certainly most 60-year-old SMSF members would have more than 40% of their assets in shares and property and wouldn’t be told otherwise.
Look at your assets. Call your super fund and ask them for a breakdown. Should you be more aggressively invested?
3. Stay in the workforce
Not only does staying in the workforce, at least part-time, keep you active, in touch with friends and colleagues, but will also help continue to build your super balance. From a health perspective, continuing to do some regular work has enormous benefits.
Retirement shouldn’t be going from 100 to 0 in a work sense. Too many people feel a great loss of identity when they leave work. If you want to keep working, do that. Ease yourself out. Many employers want to keep you around to pass on your knowledge to the young turks (see Saying goodbye to work … slowly).
And there are more benefits for those who can make the most of what’s next.
4. Transition to retirement (TTR) if you’re over 60
If you’re over 60 and still working, and you’re not on a transition to retirement pension, then it’s almost certain that you are paying more tax than you should.
TTR pensions were designed to allow Australians to move slowly into retirement. Cut down by a day or two a week, but receive a super pension to supplement your lost income.
But it’s become way more important than that. It’s now a financial must for those looking to maximise their superannuation and minimise their tax in the run-up to retirement, particularly for the over 60s, for whom it works best.
The super pension that you receive via a TTR when you’re 60 or older is tax-free income. However, you can still contribute to super up to age 65 (the restrictions start after 65). So, it’s a tax-free income from your super and then super contributions where you only pay tax at 15% (up to the concessional contribution limit, which includes your Superannuation Guarantee payments).
As an added bonus, your pension fund also stops paying tax.
5. Pay down the mortgage? Or pay into super?
I have covered this topic earlier (see How to choose between super and the mortgage). But the basics are that with mortgage rates at 5%, it can often be worth salary sacrificing the money into super until you can access it tax free, then paying down the mortgage.
Depending on your situation, it can add tens of thousands of dollars to your super lump sum. See an adviser, as the maths are tricky, depending on your income and super balance.
6. Start planning for your age pension
Many won’t have enough assets as to lose access to the government age pension when they turn 65. That doesn’t mean that they shouldn’t try to make the most of these strategies.
However, you can also do a little planning for the government age pension. When close to pension age, you should learn about the value of the home and how it is counted towards the financial limits, whether assets would be better sold before or after retirement and knowing the gifting rules – sometimes it might be worth giving some to the kids outside of timeframes when gifting can catch you out.
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.
- Former prime minister Paul Keating has called for restrictions on self-managed super funds’ use of debt to buy property. “If I was treasurer today, I would be looking very hard at the whole entitlement or availability of debt to SMSFs,” Mr Keating told reporters.
- The Australian Securities and Investments Commission has warned in its Strategic Outlook paper that it is still concerned about the quality of financial advice. “Structural change in the financial system through increasing assets held in superannuation (including self-managed superannuation funds) and globalisation is magnifying this risk,” ASIC said.
- The ATO has warned SMSF trustees seeking loans from outside regulated financial institutions. The ATO said SMSF members in this situation should be “very careful” with their arrangements, according to media reports.