Preservation age and building retirement savings

Wealth Management Insights

Commonly people see their retirement as the time to access their superannuation balances. However, when you can access your super benefits actually depends on your preservation age, which currently stands at age 55. This will be changing with regulations pushing the preservation age up to 60 for people born after 1st of July 1964. This is being applied as a stepped process and is illustrated in the table below.

Date of birth Preservation Age
Before 1 July 1960 55
1 July 1960 - 30 June 1961 56
1 July 1961 - 30 June 1962 57
1 July 1962 - 30 June 1963 58
1 July 1963 - 30 June 1964 59
From 1 July 1964 60

Your preservation age makes up part of the conditions of release for super benefits, which govern when super benefits can be accessed. There are early access conditions of release including financial hardship, incapacity, compassionate grounds and terminal medical conditions. The most common conditions of release remain meeting preservation, at age 65 or death.

There is however, a public misconception that you are able withdraw your entire super benefits at preservation age. The regulations state that in order to have access to your full retirement benefit at preservation age you need to be retired. As the majority of people are still in the workforce at preservation age they are allowed to take up a transition to retirement (TTR) income stream. The TTR Income stream is designed to supplement your work income as you become closer to retirement or the current pension age of 67.

As you cannot access your full benefits you are allowed to draw out between 4% and 10% of the current balance within the TTR pension fund. Under current regulations, once the age of 65 is reached you can choose to take the balance out as a lump sum or transfer it over to a regular account-based pension income stream and draw it down at your own discretion, regardless of being in the workforce or not.

Wealthy Australians that have retired and are of preservation age are able to access whatever they have inside their superannuation. Being in this situation is rare, and therefore the majority of Australians who have reached preservation age can consider starting a TTR income stream. However, if you do not already have adequate savings for retirement, there is a question as to why you would want to start drawing down on your retirement assets. Being of preservation age and still working provides the opportunity to use a transition to retirement strategy with the goal of boosting your net wealth within super in a more effective manner than solely contributing additional funds.   

A TTR strategy is designed to boost superannuation by increasing contributions to take advantage of super’s tax-friendly nature. The TTR pension withdrawal then tops up the reduction of income. The desired result is an increase to your balances inside super without decreasing your net income. The key here is taking advantage of the different tax provisions that exist personally compared to those levied on superannuation.

The overall gain can often be amplified, particularly during the ages of 55 to 70, where there tends to be surplus cash flows due to low debt levels and children becoming less of a financial drain. Therefore, a greater benefit can be realised through additional contributions in conjunction with the TTR income stream. When successful the strategy results in a large increase to overall wealth. With an effective strategy and growing compounding benefits, your remaining years in the workforce can be vital to a comfortable retirement.  

Working out the optimum withdrawals and contributions for a successful TTR strategy is difficult. You will need to take into account the tax consequences both inside and outside of super and ensure that all associated benefits and potential risks to your position are understood. A TTR strategy is definitely not beneficial for everyone, but for those that are in a position to take advantage will see a substantial difference to their retirement lifestyle.

To find out if you should consider a transition to retirement strategy speak to a qualified financial adviser who can assist you in determining what strategy is best suited to your situation.  

This presentation article has been prepared by RSM Financial Services Australia Pty Ltd ABN 22 009 176 354, AFS Licence 238282. This article does not take into account your individual objectives, financial situation or needs. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.