Carving Out A Smoother Retirement

Sydney Morning Herald

Saturday October 27, 2007

Simon Hoyle

More people are taking advantage of schemes that help ease the transition from the workforce. SIMON HOYLE reports.

The switch from full-time employment to retirement can be a big wrench for a couple.

It is not just money you have to worry about when you retire - far from it. For as long as 40 years, or more, one or the other of you (and possibly both) have spent a considerable period of time every day in an environment quite unlike home.

In many instances, you and your partner may have to become reacquainted. Retirement means adjusting to being around the house a lot more, and finding things to actually do. There are only so many times in a week that you can clean the windows, plant a tree or wash the car. And the local club is a nice place for a meal ... occasionally.

The growing realisation that there is more to retirement than just money is one of the reasons an increasing number of people have, or are expected to, make the move into retirement more gradually.

Instead of working full-time right up until the last day and then going cold turkey, as it were, there is a trend towards winding down gradually, phasing work out over a period of time, and easing into retirement rather than leaping straight in.

This so-called "transition to retirement" is a recognised strategy, and one that is catered to by financial planners and by financial product providers themselves under new superannuation rules. The Transition to Retirement Income Stream (TRIS) is such a product. (These products are sometimes also called Transition to Retirement Allocated Pensions, usually until the marketing department figures out the acronym - TRAP - and sometimes they are called Transition to Retirement Pensions, or TRPs.)

Whatever they are called, these products are designed to make retirement a gradual, less traumatic event, both financially and personally. In essence, once you reach what is called your superannuation "preservation age" - age 55, if you were born before 1 July, 1960 - you are eligible to start a TRIS. You can reduce the hours that you work, and use the TRIS to supplement your income. Or you can use it in a number of other ways.

Before the super rules were amended to allow you to use a TRIS, you had to have retired completely or reached age 65 before you could get your hands on your superannuation. A TRIS allows you to use your super savings to supplement your income while you make the transition.

As with all things super-related, there are some rules. For example, a TRIS must be structured as what is called a "non-commutable" income stream. That means, in the world where we speak English rather than Superannuation, you cannot take it as a lump sum until you permanently retire or reach age 65.

There are maximum and minimum limits on the amount that you can and must withdraw from your TRIS each year. If you're aged between 55 and 65, you must draw down at least 4 per cent of your account balance each year, and no more than 10 per cent each year.

There is no formal limit on how much you can use to set up your TRIS (although some product providers may set a minimum, for administrative reasons).

Michael Dwyer, chief executive officer of the public-offer First State Super, says there is a clear and growing demand for transition to retirement products. In response, First State Super, in conjunction with Mercer Wealth Solutions, has developed an online calculator, believed to be the first of its type.

It took several months of solid work and liaison with the Australian Securities and Investments Commission and Australian Taxation Office to get the calculator right, but Mr Dwyer says it was worth the effort.

He says First State Super members use calculators and other online tools more than members of other funds he has previously been associated with.

"Our calculators get used a lot," Mr Dwyer says. "[In other funds], when you have a disparate membership, spread across many areas, the take-up of calculators is a lot lower than I've seen here in my three years at First State Super.

"Certain occupational groups you find are more willing and have a greater appetite for internet transactions. We have a high white-collar core in our membership."

The First State Super calculator is designed to help members get a handle on how transition to retirement might work, and how a TRIS can fit in with strategies such as salary sacrifice to produce an income for an individual before full retirement.

The head of investment and technical services for MLC, Paul Maddock, says there are two main strategies involving a Transition to Retirement Pension.

You can cut back on the number of hours you work and use a TRP to replace the forgone income.

Or, you can continue to work as usual, salary sacrifice some of your income into superannuation, and use a TRP to replace some of the income you sacrifice

The income you receive from the TRP is taxed at your marginal tax rate, but you receive a 15 per cent tax offset on payments if you are aged 55 to 59, so the TRP income is more tax-effective than salary income. (After age 60, income from a super fund is tax-free.)

Mr Maddock says it is important to realise that in the first scenario you will be drawing down on your retirement capital. But the aim in the second scenario is to increase your retirement savings - this occurs in part because the amount you salary sacrifice to super is greater than the amount you receive from the TRP, and partly because of the tax effect.

"Probably the primary one is to enable people to ... transition to retirement, reduce their working hours and replace salary with income from the TRP," Mr Maddock says. "That's significant, because retirement can be a very sudden shift - for all concerned - and smoothing that transition can be good. This enables people to transition smoothly, from a financial perspective and from a personal perspective.

"The other way they can be used is to help people who are working full-time to boost their nest egg. You work the same hours, salary sacrifice into super, and replace salary with income from the TRP."

Mr Dwyer says the main aim of the calculator is to allow members to ask a range of "what if?" questions to see how the strategies work. Members can plug in their current salaries, how much they plan to salary sacrifice, how much they want to set up a TRIS with (and how much they want to withdraw), and then compare the bottom-line results.

Mr Dwyer stresses that the calculator is not meant to replace the input and advice of a financial planner, but rather to help members see how different decisions produce different outcomes, and to familiarise them with the ideas and concepts.

MLC's Mr Maddock says that even though TRPs are relatively straightforward - certainly compared to other aspects of superannuation - there is "still enough to do that you need advice".

"There are people who can do it themselves, for sure, but to have this sort of stuff explained and to make sure you get the steps right, it's another area where, really, advice can help," Mr Maddock says.

Another area where advice might help is in choosing the right investment assets to support the transition to a retirement income stream. There are two schools of thought when it comes to superannuation investment.

One says that your first investment horizon extends to the day you retire. When you are young you invest in volatile, relatively risky but relatively high-returning assets.

As that day approaches, you should become more conservative, moving an increasing proportion of your retirement savings into more secure, stable but lower-returning assets. Then when you retire, you have a relatively secure and stable portfolio to provide you with income during retirement,

The other school of thought says that your investment horizon ought to be the same as your life expectancy. You don't want to run out of money before you die, and when you retire your money may have to last for up to another 30 years.

This means your investments do not change much when you retire - it is a milestone in your life, but not necessarily in your investments - and you should maintain an adequate exposure to higher-returning, higher-risk assets to make sure your money lasts long enough.

"We tend to look at the whole-of-life scenario," Mr Maddock says. "You look at people's life expectancy and that will give you an indication of how long they'll need their money to last, and that should guide their asset allocation decision.

"If you look at people who are aged 55, for a male, life expectancy is around 26 years, and for a female it's close to 30 years.

"It's reasonable to have quite a proportion of growth assets, to counter inflation that may occur over that time. But it comes down to the individual and their tolerance for risk and volatility."

As well as being involved in the development First State Super's TRIS calculator, Mercer last week launched a transition to retirement product of its own.

David Anderson, head of Mercer Wealth Solutions, says the Mercer Super Trust Transition to Retirement Allocated Pension offers 34 investment options, including growth, shares, property, diversified alternatives and socially-responsible investments.

Mr Anderson says there is clearly a need for advice and more information when it comes to such products.

"People need help co-ordinating all the pieces of their financial game plan," he says.

Mr Anderson says that in March this year Mercer conducted a survey on recent superannuation rule changes. It surveyed a random sample of 300 working Australians aged over 50.

"Nearly three in four were unable to articulate any changes and only 18 per cent mentioned the tax-free access to super at age 60," Mr Anderson says. "Less than half were aware of allocated pensions."

© 2007 Sydney Morning Herald

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