Transition to retirement

Unlike most professions, retirement from medicine is often a gradual process occurring over a number of years. If you are thinking about easing yourself into retirement you can also use this to your advantage under current superannuation rules. Steve Crescitelli from the Commonwealth Bank explains how a transition to retirement strategy can be a tax effective way of maximising your contributions to superannuation in those final few working years.

What is a transition to retirement strategy?

Transition to retirement strategies are designed to give you greater flexibility as you begin the transition to retirement. Once you reach what’s known as your ‘preservation age’, you can access your super by drawing a pre-retirement pension (a regular income stream drawn from your super savings).

How to determine your preservation age?

By law, all super contributions are locked away or ‘preserved’ until you reach your preservation age. Your preservation age is based on your date of birth (as set out in the table below). Once you reach your preservation age, you can begin drawing a pre-retirement pension. (You will need to check with your super fund as not all funds offer pre-retirement pensions.)

Date of birth Preservation age 

What is a pre-retirement pension?

A pre-retirement pension allows you to draw a regular income from your super while you’re still working, provided you have reached your preservation age. There are restrictions on accessing your super as a lump sum during this pre-retirement phase.

Why start a pre-retirement pension?

A pre-retirement pension gives you the flexibility to draw down an income and at the same time contribute to your super, e.g. through salary sacrifice, in a way that may be more tax effective than just relying on your salary. In most cases, you’ll pay less tax on your pension income than you would on the same amount of salary or wages. 

A word about contribution caps

While there are no limits on the amount you can contribute to super, the government has set contribution caps that determine how much you can contribute to super in any one year without penalty. There are caps on both concessional (pre-tax) and non-concessional (after-tax) contributions. If you exceed these caps, you could be penalised with hefty tax rates.

• Concessional cap - Concessional contributions include salary sacrifice, super guarantee and personal deductible contributions. If you are under age 50 on the last day of the financial year, the cap is $25,000 (indexed) in the 2009–10 financial year.
• Transitional concessional cap - If you are aged 50 or over on the last day of the financial year between 1 July 2007 and 30 June 2012, the transitional concessional contribution cap will apply. This cap is $50,000 in 2009–10 and is not indexed. From 1 July 2012, the concessional cap will be $25,000 (indexed) for taxpayers of all ages.
• Non-concessional cap - The cap for non-concessional contributions is currently $150,000 per year, or $450,000 over three financial years (under the ‘bring-forward rule’) if you are under 65 in the financial year. The cap will remain for the 2009–10 financial year, but in future will be calculated as six times the level of the indexed concessional contributions cap. There has been no change to the ‘bring-forward rule’.

It’s important to keep your financial planner informed about any contributions you make so they can ensure you don’t exceed the contribution caps. This is especially important given the coming reductions in these caps. Contributions over the caps are taxed at 46.5% (ie 31.5% in addition to the standard 15% tax on concessional contributions).

To find out more about transition to retirement strategies or other services offered by Commonwealth Private, please contact:

SA/NT: Steve Crescitelli on 08 8104 5757 or steven.crescitelli@cba.com.au.

QLD: Antony Pupovac on 07 3237 3792

VIC: Malissa Tobias on 03 9675 7135

WA: Clint McNally on 08 9482 6240

NSW: Damien Rayner on 02 8292 5450

^{Important information}

^{This article is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy any securities or financial instruments. This article has been prepared without taking account of the objectives, financial situation and capacity to bear loss, knowledge, experience or needs of any specific person who may read this article. All recipients should, before acting on the information in this article, consider the appropriateness and suitability of the information, having regard to their own objectives, financial situation and needs, and, if necessary seek the appropriate professional or financial advice regarding the content of this article. Steve Crescitelli is an authorised representative of Commonwealth Private Limited AFSL 314018 ABN 30 125 238 039.}