Will I be financially ready?
Do I really want to reduce my working hours and, if so, is the option available to me?
The desire to work less is one of the main reasons why people choose to make use of Transition to Retirement. If you decide to go down this route you need to be 100% sure that you are actually ready (emotionally and professionally) for a time of semi-retirement. If you can answer in the affirmative you will obviously also have to enquire whether your employer will seriously consider your request for reduced hours.
How will working fewer hours affect my income, and will the income from my super be sufficient to make up any shortfall?
You will have to do a fair bit of number crunching before taking the final step to reduce your working hours. This will enable you to make an informed decision on whether you will be able to maintain your standard of living during this new phase of your life.
How will my choice impact future benefits?
Financial decisions can have very significant long-term implications. You should therefore do some projections on how your decision to access your pension early will affect your long-term income. This is particularly important when a defined pension, where the benefits are related to age and length of service, is involved.
What will the impact of my choice be on my life insurance arrangements?
It may be the case that your existing life cover ceases or reduces if you access your pension early. It could also be that, if new contribution arrangements are entered into, insured sums may reduce or that medical examinations (possibly leading to new conditions being imposed) may be required.
Does my current superannuation fund provide a non-commutable income stream?
Superannuation Funds are not under any legal obligation to offer non-commutable income streams. You should therefore find out whether your provider offers products that are compatible with Transition to Retirement. If they don’t then it should be possible to move your superannuation savings to a fund that does. Before you do that however, you should make sure that you will be able to comply with all the relevant rules and eligibility criteria of the new fund and that you will not be losing significant benefits by moving.
Case Study of John Smith…
John Smith, 58, decides to make the change from working five days a week to three days. He was planning to retire at 60, but if he can move to part-time he would like to be working into his 60s.
His current full-time income is $65,000 including 9 per cent super contribution ($5367) – after tax this equates to $44,989. His part-time (three days a week) income will reduce to $39,000 including 9 per cent super ($3220). Through transition to retirement, John can supplement his income by establishing an allocated pension that gives him, for example, $20,000 per annum, provided he has enough super to do so. This will give him a net amount of $45,349.
If John takes the transition to retirement path he can reduce his hours of work while still earning a similar income and continuing to contribute to superannuation.
If John decides to retire when he is 62, his total super benefits may reduce by the difference between his continuing super contribution and the amount drawn down through the allocated pension. However, this depends on the amount that is contributed to super on his behalf and the earnings of the super and allocated pension accounts.
If John decides to return to full-time work at any time, he can direct the allocated pension back into his super fund.