Tax-effective ways to boost your super as you transition from work to play

The importance of flexibility and the freedom to enjoy retirement looms large as Australians near retirement age. 

Eight out of ten Australians want the flexibility to access their retirement savings if they need to, according to the CFS Rethinking Retirement report, conducted between October and December 2023.  

And two in three Australians plan to keep working in some capacity after they retire. 

But while super may sometimes be thought of as savings that can’t be used until you retire from full-time work, there are tax-effective strategies available to help you grow your savings, reduce your tax and even access some of your super as you get closer to retirement. 

A transition to retirement (TTR) pension can help you access the tax benefits of super in a couple of ways.  

TTR pensions enable you to access your super while you’re still working by drawing down some of your savings as a tax-free income stream from age 60. 

TTR pension payments can then be used to help meet your living expenses, allowing you to afford to make additional tax effective super contributions to boost your super balance. 

How does it work? 

You can access a TTR pension once you reach your preservation age if you’re not retired. 

Preservation age ranges from 55 to 60 depending on your date of birth, however from 1 July 2024, preservation age is age 60 for anyone born on or after 1 July 1964. 

Once you commence a TTR pension, it can be very tax effective as any TTR pension payments you receive once you reach age 60 are paid to you tax-free. 

The amount of pension payments you receive from a TTR pension is chosen by you, but it must be between a minimum of 4% and a maximum of 10% of the account balance each year. 

What are the benefits? 

A TTR pension could be used to: 

• top up your income 
• reduce your work hours while supplementing your income 
• boost your super by making tax effective contributions while reducing your personal tax. 

An important consideration when commencing a TTR pension, is that you will be withdrawing money from your super so if you don’t top it up, you may have less when you eventually retire. 

How can I use a TTR pension to boost my super? 

There are two main ways of making concessional (pre-tax) contributions to super – salary sacrifice and personal deductible contributions. These concessional contributions are taxed at a maximum of 15% if your overall income is less than $250,000. You’ll also continue to get compulsory super contributions from your employer.  

If you salary sacrifice money into your super from your pre-tax salary while drawing a TTR pension, you may pay less tax overall as your taxable income is reduced, and the tax payable on salary sacrifice is generally lower than your marginal tax rate.  In addition, any TTR pension payments you receive over age 60 are tax-free.  

This means you can use the tax- free TTR pension payments to replace the income you have salary sacrificed, and your super gets a boost while you keep the same amount of take-home pay. 

Personal deductible contributions 

The other way of making a concessional (pre-tax) contribution is making a personal contribution to your super fund and claiming a tax deduction for it. Contributions that you claim a tax-deduction for are generally taxed at 15% within your super fund. 

Personal deductible contributions can be made throughout the year, or at the end of the financial year when you might have a clearer picture of what your taxable income will be and how much you should claim as a tax deduction. 

There are some rules around making a personal deductible contribution, such as needing to lodge a valid notice of intent form with your super fund within the required timeframes and including the deduction amount in your tax return. 

There are also limits and rules around concessional contributions and TTR pensions, so consider talking to a financial adviser to see if this is the right strategy for you. 

Another way of contributing money into the tax-effective super environment to prepare for retirement is by making a downsizer contribution.  

If you're aged 55 or over and sell your home, you may be able to top up your super savings tax-free from the proceeds. 

How does it work? 

Downsizer contributions don't count towards the limits on how much you can contribute to your super in a given year as concessional (pre-tax) or non-concessional (after-tax) contributions. However, they are limited by the sale price of your home and capped at $300,000 per person.  

Plus, if you’re part of a couple, both members may be able to contribute, which means up to $600,000 of the sale proceeds can go into your super. 

What are the benefits? 

No tax is paid when deposited into your super account, and you can also withdraw it tax-free later on. 

No work test or upper age limits apply. This is particularly helpful if you’re aged 75 or over, because you’re generally unable to make other voluntary contributions at this age. 

There are other rules you must satisfy: for example, the home must have been owned by you or your partner for at least 10 years immediately prior to the sale. It must also have been your primary residence at some point. 

Your downsizer contribution must also be made within 90 days of the time the change of ownership occurs, which is usually the date of settlement.  

Account-based pensions enable you to receive regular payments from your super savings during retirement.   

They can not only provide you with tax-free retirement income, but also ensure all investment earnings within your pension account (including capital gains) are tax-free. 

How does it work? 

Generally, you can set up an account-based pension when you permanently retire and reach your preservation age. 

You can customise your account-based pension to suit how much you’d like to be paid, and how often.  

Since your money stays invested, it will continue to generate investment returns.   

However, there’s a minimum amount you must be paid each financial year from your account-based pension, based on your age. This is called a minimum pension payment or “minimum drawdown rate”.  

What are the benefits? 

• Account-based pensions are very flexible: you can be paid weekly, fortnightly, monthly – whatever suits you. 
• The payments are tax-free after the age of 60.   
• There’s no tax payable on your investment earnings.