David earns $50,000 per year as salary and has accumulated $300,000 in super. Now he’s reached the age of 55 and he’s started to think about his retirement plans.
On one hand, he would like more time now to play golf, go fishing and spend time with his grandchildren. On the other hand, he enjoys his work and the salary it brings and doesn’t feel ready to give it up entirely just yet. David is trying to decide whether he can transition himself into retirement by using a pre-retirement pension. The question is whether he has enough money now to retire on, or whether he can use a pre-retirement pension so that he can effectively start his retirement today by using it to supplement his part-time salary. David would also like to maintain the same level of after tax income throughout.
If David retires immediately
If David retires now, will he be able to maintain the same after tax income of $41,700 as when he was working? David’s net income after receiving his pension payment would be as follows:
| Pension payment |
$42,340 |
| Income tax and Medicare |
($5,578) |
| 15% pension tax offset |
$6,351 |
| Net Income (rounded to nearest hundred dollars) |
$41,700 |
Note: David’s income tax and Medicare includes the low income tax offset which, with the 15% pension tax offset, mean David’s only tax liability is for a Medicare levy of $635.
To maintain an after-tax income of $41,700, David needs to draw a pension payment of $42,340. This is 14.11% of his pension account balance, which means that he will run down his pension balance soon. In fact, if David continues to draw a pension payment at this rate, he will have exhausted his pension account by age 63.
If David uses a pre-retirement pension strategy
David works part-time and receives a salary of $30,000 per year, which he can supplement with a payment from a pre-retirement allocated pension, as follows:
| Salary |
$30,000 |
| Pension payment |
$16,230 |
| Income tax and Medicare |
($6,959) |
| 15% pension tax offset |
$2,435 |
| Net Income (rounded to nearest hundred dollars) |
$41,700 |
Summary
| Option | Retirement balance* at 65 | Minimum pension on that balance |
| Retire immediately at 55 | NIL | NIL |
|
Work part-time until 65, income supplemented by pre-retirement pension |
$314,123 |
$15,710 |
* Source: Colonial First State. Assumptions: Earning 7.7%pa after fees and before taxes with inflation at 3%. Using 2013-14 income tax rates. The pension is paid as an allocated pension. Superannuation guarantee contributions are 9.25% in year 1, increasing to 12% by year 7, of gross salary before any salary sacrifice. All superannuation contributions and pension payments are made regularly throughout the year. A change to any of the assumptions and variables can provide significantly different results. This case study is for illustrative purposes only. Your individual circumstances have not been taken into account.
Want to know more?
If you would like to know more about pre-retirement pensions please contact our office. We can explain the options and which strategies and investments are best for your personal situation.
