Transitioning to retirement pensions

A new initiative enables people over 55 to make considerable tax savings. It forms part of the Federal Government’s platform aimed at encouraging older workers to remain in the workforce. Known as the Transition to Retirement Pensions measure, it uses non-commutable income streams (NCIS) to allow taxpayers to draw down from their super fund while continuing to work after they turn 55.

The basic concept enables people nearing retirement age to salary sacrifice all or part of their salary into their super fund and draw a pension from the same super fund whilst they remain working. This will be particularly appealing to those who don’t need larger than average incomes.

Example
Alister is 56 with a $100,000 salary and decides to salary sacrifice $37,000 into his super fund. His new salary is now taxed at no more than 31.5% as he is now just below the 42% tax threshold. Tax payable on the entry contribution to the super fund is 15% of $37,000 or $5,550.
However, Alister still has all sorts of financial commitments and requires to draw down a pension of $10,000 from his superannuation. Without going into all the calculation details, in effect Alister will pay about $24,000 tax (including the Medicare levy) by utilising his NCIS as opposed to about $32,000 if he had received the full $100,000 salary in his own name.

The Tax Commissioner has indicated that the ATO will only be concerned where accessing a superannuation pension and undertaking salary sacrifice may be “artificial or contrived”.

The NCIS option is best suited to taxpayers with incomes high enough for direct tax savings to occur. However, there are some advantages available if you are on lower incomes. Saward Dawson would be pleased to help you further understand the NCIS option and how to best take advantage of it.

Published : 30 March 2006