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Smart Investing
By Robin Bowerman
10 March 2006

People approach retirement with dramatically different emotions.

Some people cannot wait to bid farewell to work while others seriously worry about what they will do with their time - and then of course there is the issue of is there enough money to make ends meet.

Superannuation laws were amended last year to help smooth the transition to retirement and it certainly gives people more options and flexibility when retirement becomes a serious option.

The big change is that it allows people to start drawing down some of their money via a super fund pension while they are still working.

This is good news particularly for people who do not want to turn their back on work totally but would like to scale back or downshift to use latest social trend catchphrase.

However, when it comes to superannuation and pension phase, the rules are complex. A small number of largely fringe financial planners have again damaged the industry's reputation with the Westpoint collapse recently but an even bigger tragedy would be if it stopped people getting professional advice when planning the shift from work to retirement.

As always, when the Government changes rules different strategies and approaches are developed to take advantage of what is on offer. One gaining greater acceptance in the market as a result of the changes, for example, is replacing your salary with a pension income. This particular strategy allows you to determine the right balance between the level of salary and the amount of pension that you want to receive. For example, the new rules allow you to salary sacrifice all of your salary into your superannuation fund while on the other hand you are receiving pension payments from the same superannuation fund. This may seem odd that the law would allow you to do this bearing in mind the tax difference between superannuation and individual tax rates, but it is in the detail where you find out that there really is no major difference in tax (which is why the Tax Commissioner has sanctioned the use of this strategy).

The salary sacrifice contribution going in will be taxed at 15% (versus your marginal tax rate) and then the earnings will be taxed at 15%. However, the pension payments that you then receive out of the fund either via allocated pension or market-linked income stream would be taxed at your marginal tax rate (less any rebate that may apply). So, in doing the maths behind this transaction, there really isn't any major tax difference.  Where this strategy would have greater significance is if you were in a position where the pension payments you are receiving from the superannuation fund are less than the amount of salary that you are sacrificing as a contribution. Then you are simply leveraging the tax advantage of super to build your retirement savings faster in the runup to full retirement.

Salary sacrifice strategies may also increase eligibility to other concessions, including the Mature Age Workers Tax Offset (MATO), the Low Income Earners Tax Offset (LIETO), Family Tax Benefits (FTB), the Pensioner/Senior Australians Tax Offset (limited) and the Government Co-contribution.

It is that sort of technical detail that good financial planners will factor in and model to see if this sort of strategy helps you achieve your retirement funding goals. If you are the trustee of your own self-managed super fund then you need to be doubly careful - you have to make sure everything is done correctly from both your personal and fund's viewpoint. For example does the fund trust deed allow for this type of strategy?

Why has the federal government encouraged us to move in this direction? That is much simpler to explain. If people continue in part-time work so that their income simply covers their living expenses which leaves their super savings to grow then that will increase significantly the number of years your super will be likely to support your retirement before you need to draw on the pension.

And that is in both the Government's and your interest.