Planning your retirement isn’t just about what you are going to do once you stop work. It’s also about planning the actual process to make the most of your accumulated wealth. This includes tax planning. After all, the less tax you pay, the more you can spend on the things that matter most to you in retirement.
To begin with, you might want to consider the month in which you retire. If it’s a retirement brought on by redundancy, there could be a healthy lump sum with accumulated long service leave or holiday leave. Waiting until the anniversary of your employment date may make a difference to your payout as the formula is based on the number of complete years. Whether or not you are retiring due to redundancy, waiting until the start of the new financial year may reduce your tax liability.
Genuine redundancy payments are tax free up to a limit based on your number of years of service. It’s a flat dollar amount plus an amount for each complete year of service. Any amount above this tax-free sum is treated as an Employment Termination Payment (ETP) and is taxed depending upon your age and the components that make up your payment. Golden handshakes are taxed as ETPs.i
Consider taking a holiday
Holiday pay is also an area to consider. It may be worth your while to stay in employment and take your holidays immediately before you retire. That way you can still be accumulating holiday leave while you are taking the holiday and you will also be entitled to superannuation guarantee contributions! All this is lost if you take your leave as a lump sum payment.
Some companies offer approved early retirement schemes to encourage certain groups to retire early. Like genuine redundancy, these payments are tax free up to a limit based on the number of complete years the employee has worked for the employer. Any amount above the tax-free limit is treated as an ETP.ii
Selling a business
If you are selling your practice or business, you may benefit from the small business capital gains tax (CGT) concessions. Provided you have net assets of less than $6 million and a turnover of less than $2 million, you may qualify as a small business. If you have owned your business asset for more than 15 years, then it is CGT-free. If you are under 55 then the capital gain up to a lifetime limit of $500,000 must be rolled over into your super to benefit from the retirement concession. This is not the case if you are aged 55 or over.
Regardless, you should consider putting the funds from the sale (the proceeds under the 15-year exemption and the capital gain under the retirement concession) into your super as this “contribution” is carved out from the new rules which reduce the non-concessional contributions caps.
Age at retirement
The age you retire is also significant. While money in the pension phase of super is tax free, income payments are also tax free once you have turned 60. So it may make sense to hold off drawing down your super until you have reached that age.
If you are at or over the preservation age (55 if you were born before July 1960) but under 60, then all your concessional contributions to super and fund earnings are taxable. However, the first $195,000 is tax free when taken as a lump sum. If you opt for an income stream, then the taxable amount is taxed at your marginal tax rate but you will be eligible for a 15 per cent tax offset which could reduce your tax payable.
Your non-concessional contributions to super – those that were made with after-tax money – are, and remain, tax free.
Retirement is for the rest of your life, so it’s worth taking time to plan ahead. Call us if you would like to discuss how you can make the most of your retirement nest egg.