Slow down and enjoy life, sure, but stay within the lines

There comes a time in life when you just want to slow down a bit. But that’s not to say you want to stop altogether.

Workers who have reached the superannuation preservation age can tailor a better life for themselves by flipping to a transition to retirement strategy, a nice trade-off for anyone weary of the same of old Monday-to-Friday grind.

The idea is you start an income stream from your super, drop a day or two of work a week, and salary sacrifice as much of your ongoing pay as you feel comfortable with so that you benefit from the tax advantage of superannuation.

Instead of your pay being taxed at your marginal rate, the money landing in your new accumulation account will taxed at 15%.

When it comes to drawing down an account-based pension you have to stay within the lines, however. A member will need to pay themselves not too little and not too much.

For anyone younger than 65 the minimum annual drawdown allowed is 4% of the member’s account balance, a percentage which increases with the member’s age, but the maximum annual payment is 10%.

If a member pays herself too little or too much, the Tax Office will decide that the transition to retirement scheme ended at the beginning of the financial year.

When that happens, the member will be told the tax advantages of superannuation no longer apply, and all income paid from the super account for that financial year will be taxed at the marginal rate. For an individual earning between $37,000 and $80,000 a year, that’s 32.5 cents in the dollar. Between $80,000 and $180,000, it’s 37 cents in the dollar. More than that, 45 cents.

A year’s budgeting can be sent into disarray if that happens, and worse than that it could mean a return to full-time work – just what you wanted to avoid.

Under and over

The rules are a little different for members younger or older than 60. Anyone older than preservation age but younger than 60 will need to declare the taxable component of the transition to retirement income stream in their income tax return. The same applies if the income stream is paid from an untaxed source.

If a member is older than 60, and the income stream is paid from a taxed source, there is no need to include it in their tax return.

Minimum withdrawal amounts vary by a member’s age at the beginning of the financial year, as follows:

• Members under 65 must withdraw at least 4% a year.
• Those aged 65 to 74 must withdraw at least 5% a year.
• Those aged 75 to 79 must withdraw at least 6% a year.
• Those aged 80 to 84 must withdraw at least 7% a year.
• Those aged 85 to 89 must withdraw at least 9% a year.
• Those aged 90 to 94 must withdraw at least 11% a year.
• Those 95 or older must withdraw at least 14% a year.