Pre-retirement pensions are available from age sixty but aren’t widely used as most people don’t need the income they provide while still working. However these pensions offer quite a range of opportunities.
People who are fully retired can use their superannuation to set up retirement pensions from age sixty. They are fully tax free.
People who have reached sixty but are still working can start pre-retirement pensions. While the pension payments being paid out are tax-free the fund trustees pay tax internally on the earnings at the same rates as in super accumulation accounts. There is no immediate tax saving or obvious benefit.
However, pre-retirement pensions can pay out up to ten per cent of the pension account balance in each financial year. The pension payments can be drawn annually in advance with the first one immediately. This aspect can provide attractive opportunities for some people.
Some sixty-year-olds still have consumer debts at high interest rates that need to be paid off. Drawing a pension payment can do that. Other pre-retirees may have mortgage balances outstanding that they are keen to finalise. That may be possible, depending on the amounts involved.
Setting up a pre-retirement pension can also fund a large salary sacrifice plan, resulting in less tax paid and more super at retirement.
The ten per cent up-front pension payments have also been used for other worthwhile purposes. Some small business owners have used them to buy needed equipment such as a new truck. The owners of a small farm used the payment as a deposit on the purchase of the property next door, to expand their operation.
The owners of an old home badly in need of repairs used a pre-retirement pension payment to fund them. A person who lived on a property that could be subdivided used a pension payment to fund the sub-division costs so they could then sell the extra block.
Needed improvements could be done to an investment property. A person could use a pension payment to start a sideline business that they plan to continue after their formal retirement. There are many worthwhile project possibilities.
People should not draw money from their super for frivolous or wasteful purchases of course. If only one ten-per-cent pension payment is needed the account can then be converted back into a super accumulation account.
Most often pre-retirement pensions are used to increase income to live on, so that more salary can be sacrificed into super. This reduces income tax and builds super faster. Financial advice can help determine what would work best for each person.