Possible taxation advantages of Transitioning to Retirement

Part of the appeal of Transition to Retirement is that it allows you to benefit from the lower tax rates associated with pension income (pensions are generally subject to a 15% tax offset for people under the age of 60, and tax free if taken after age 60). This means that it might be possible to receive part of your income at a lower tax rate, while salary sacrificing a portion of your income subject to a higher tax rate by adding it to your superannuation fund.

The salary sacrificed contribution will then not be taxed as direct income, but rather in the form of a contributions tax to be paid from within the fund. The rate at which this is levied (currently 15%) is much lower than the marginal tax rate that most people pay.

This can obviously translate into positive growth in the strength of your superannuation fund since you will possibly be putting more money in than you are taking out. Each situation is unique, however, so take the time to determine whether this arrangement is right for your specific circumstances.

Some of the things that you will need to have clarity on are: 

• Your personal marginal tax rate. 
• All the applicable current and future tax rates. The rate at which you pay tax will be a decisive factor in determining whether you can benefit from salary sacrifice or whether you should perhaps investigate alternative investment avenues.
• The size of your superannuation savings. If you super fund is already quite large it may be that you are in danger of exceeding the ?Reasonable Benefit Limits? threshold beyond which investing at tax effective rates becomes more difficult. Another benefit is that investment earnings (i.e. income and capital gains) on accounts in pension phase are not subject to the 15% tax normally levied on earnings within superannuation accounts.