Judy earns $50,000 per year as salary and has accumulated $300,000 in super. Even though she’s reached the age of 55, Judy loves her work, so she’s decided to keep working until she’s 65.
Judy can potentially transition herself into retirement by using a pre-retirement pension. The question is whether a pre-retirement pension can actually help her to save more for her retirement over the next 10 years.
During this period, her salary remains at $50,000 per year and her after-tax income rounded to the nearest hundred dollars at $41,700. Due to the investment earnings1 on her super and the super guarantee contributions paid by her employer, by age 65 her retirement savings would be:
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If Judy used a pre-retirement pension strategy
Judy could further increase her retirement savings by using a pre-retirement allocated pension, which gives her a 15% pension tax offset that her salary income doesn’t. She can then sacrifice part of her salary to super, which can be used to offset the reduction in her retirement savings from the pension payments. Judy’s after-tax income remains unchanged:
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Her retirement savings are then helped by the addition of her salary sacrifice contributions and the fact that she pays no tax on the investment earnings in her pension. In fact, she can increase her retirement balance at age 65 by almost $45,000 and her potential minimum pension payment at that time by over $2,200 each year.
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Summary
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1-4 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.
If you would like to know more about pre-retirement pensions, please contact our office and our Financial Planner can explain the options and which strategies and investments are best for your situation.
