Topic Nine: Employment Matters

Making the huge decision to retire and stop work immediately might be daunting for some people. Maybe you want to transition to retirement by moving to part time or casual work. Or you are finishing altogether and you want to know what steps to take before the last day arrives. In this episode I talk though employment matters including decisions you have to make before you change from your current working status. It can make a big difference in terms of your final pay, access to your super and working out the impact on your retirement income needs.

Action plan:

1) Identify what annual or long service leave you have available to you and whether you want to serve this out before retiring or take it as a lump sum. Discuss this with your employer.

2) Check with your employer when you will receive your final super contributions (and any other benefits) and check if you need to take any action to ensure the transfer of super monies if held in a corporate account.

3) Use the ATO’s income calculator to understand how much take home pay you might receive from part time or casual work. Income tax calculator | Australian Taxation Office

Transcript

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Okay, welcome to topic 9. Today we're going to talk about some things to think about when you're making decisions about your employment at retirement. And I mentioned that in my introduction that I would talk about some of these peripheral issues, and you'd be surprised at what a difference it can make when you are planning that last day of work going into retirement. So that's the scenario I'm going to look at first is if you decide to completely stop work and retire permanently. And many people, like I said, set that date, and it might be something like the 30th of June, the last day of the financial year. There are some impacts though when you set that date, and this is what I want you to think about. The first is that serving out all or part of any accumulated annual or long service leave you have before your official retirement date may actually give you a better outcome financially. And this is for two reasons. The first is that if you opt to be paid out these entitlements in a lump sum, they may be taxed at a higher rate than normal because the employer is obliged to consider the tax rate that would apply to that period. So if you've got an abnormally large sum in that period, it can result in lifting your tax rate. Now there are some exemptions to that, so it doesn't exactly mean you'll go straight to the highest tax rate, but it may mean that you will have to wait to get that tax back. So if you if it puts you in that higher bracket, you're going to have to wait until the next financial the financial year is ended and lodge a tax refund. And depending on what time of time of year that is, it could delay you receiving them for you know a year or so. So if you retired, chose to retire on 1 July, you don't lodge your tax return until after 30th of June the next year, and then you wait for that to come back. And as it relates to super, it might mean that you need to keep open or reopen an accumulation account, and we talked about that in topic four because once you move into retirement income phase, you can't contribute. Then because you're moving into another financial year. So that's one reason to think about whether or not to receive a lump sum or to work out any leave that you've got left. The second reason is that when you are working out that leave, you're still on the payroll. And so two things happen. You accrue employer-mandated superannuation for that period, and you also continue to accrue more leave. So depending on how much leave you have accumulated pre-retirement, you can see that this could make a significant difference to what you receive from your employer on your eventual retirement. Now, if you are doing this, then you're obviously going to have to try and forward plan for what the last day will be on the payroll, so your official retirement date. So that by that I mean that if you've got a year-accumulated long service leave, that's pretty straightforward. But for most people, it'll be a part year, and you'll have to work out where that's going to put you in the financial year your last day. So retiring early in the financial year can give you the benefit of meaning that you can meet the work test if you're planning to do any contributions, but also avoiding a full year of income tax. And I'll refer back to the contributions topic to you know talk about why that might help when you're making some final contributions for the year. Delaying your retirement to a later date, though, can have a negative in that it prevents you from accessing a lump sum from your super as you are not permanently retired. Now, this is really for people under the age of 65. So you might recall from previous topics that the mandated retirement age when it comes to super is 65 and that unlocks your funds. If you're less than 65, it might mean that you can't have full access to your super. And I talked about this in topic four, simply because you're not officially permanently retired, you're still on leave, but on the payroll. So that's one reason why you might not work out your leave. The second one is that if you intend to go straight into working in a part-time job or another job, um, like say you go for lighter duties or something after you permanently retire from your full-time job, firstly, permanently retiring from your full-time job after 60 can unlock your super that you've accrued to that date. But the second issue that you might have is that if you want to go into another employment, your current employer may restrict you through an employment contract or an award or something like that from going out and getting other employment while you're still on their payroll. So it's not just financial in terms of you know, do I take a lump sum or do I work it out? You really have to think about what's best for your situation. It's just to help you understand that there can be a benefit from working out leave rather than taking a lump sum, but that works both ways. There are also some disadvantages. And also when it comes to your super, and once again I talked about this in topic four. Um, you need to understand what you can access while you stay on the payroll. Now, many people who consider transitioning into retirement look at going part-time or casual, and once again, this can have an impact on your super, which we've talked about in topic four. But some of the other things to think about is that working two days a week when you previously worked five days a week doesn't necessarily mean you only receive 40% of your previous take-home pay. And I know this might seem pretty obvious to people who understand the sliding marginal income tax rates, but it's just something that I've heard people do where they say, Well, I'm only working two days a week, so currently I take home $3,000 a fortnight, so now I'll only get $1,200. It doesn't quite work that way because of that sliding scale. So the first thing I'd encourage you to do is have a go to the ATO website and I'll put a link on the page and have a look at what it might mean if you're working less on a lower tax rate and what your actual take-home pay would be. Um, so that you understand how much of an impact it might have to go to part-time before you retire full-time. The other thing to think about is that if you do switch to part-time work, we looked at um firstly that problem of accessing super potentially in topic four. In topic six, we also looked at the potential impact of employment income on CentreLink entitlements. And it's not very generous the amount of money you can earn if you want to have some entitlement to age pension. It can also affect your partner's eligibility for centrelink payments if you have one and if it applies to them. So you need to understand what income will do at the household level when it's going to tip you over, if age pension is important to you. Like I said, we talked about in topic six that there may be some other benefits like the healthcare card, but um, what the problem sometimes can be with part-time work, or is that it can be casual in nature, and that you may get extra days or overtime, like it's not it that's more common than having fixed part-time work, and what this does is it varies your income. And the problem with that is that it's hard to project it annually, and when your income has to be reported to centering, sometimes having periods of higher pay, even though they won't last the whole year, sees um the age pension getting reduced or entitlements getting reduced because of periods of higher income. So it's another thing to think about when you're going part-time, just understanding the impacts. Now, when you do make a decision to retire from a full-time job, whether or not you're retiring permanently from work or going on to other part-time work, you do need to think about your final pay and super contributions for the financial year if you want to maximize them, potentially last chance, for pre-tax contributions from employment income. You should receive your final pay from your employer in the next normal pay cycle from the retirement date that you nominate, but you need to check when this might happen because every employer is different. They may pay you on your actual retirement date. Could make a difference depending on where you sit in the financial year. It also could make a difference in you understanding if there's any gap between you when you receive that final pay and when you might want to start drawing down a retirement income from other sources, particularly super, and also to make sure that, like I said, if you're serving out on leave or something, that you are eligible to start making withdrawals because you're you're you know, can you make that I am retired declaration to your super? If you're in a corporate super fund or a defined benefit account, you may have an additional weight for super monies to be transferred into a new account. So find out the mechanism that makes that happen. Waiting for your employer to do it and assuming it will happen on the employment date, the retirement date, sorry, just doesn't always work. You may need to be proactive and actually lodge a form or or some other kind of formal notification to get that process happening. So if it's important for you that you have no gap from your final pay to when your super is available to draw down from, you need to understand what do I have to do to make this happen. If you let your employer do it for you and you don't proactively engage with them, one of the unintended consequences is that they can make nominations in a new account in your super, whether it be an income account or an accumulation account that the money goes to, in terms of firstly that type of account you don't get to nominate. Secondly, how your final contributions are to be classified, particularly in different financial years. Do you want them pre-tax? Do you want them after tax? Um, what investment option do you want to be in? Some of these, um, when it rolls over default from say a corporate superfund, they'll put it in cash in the new account, unless you nominate which option you want. Um, also, they'll cancel insurance if you don't tell them potentially. Um, so if insurance is important to you, this these are the reasons that you need to be proactive and nominate what you want to happen with this this lump sum or this pension income that you're going to receive from your corporate or defined benefit super account. Now, you may be allowed to nominate going straight into a retirement income account, and then of course, you're also going to need to nominate how much you want to draw, or they're going to nominate the minimum most likely. Now, some people, when they're in a in one of these corporate super funds or defined benefit, they may be offered the option of a lump sum or a pension, a lifetime pension. These are rare now, they're legacy products, but you might get this option or a part of them. There are pros and cons for each of these options, and no one can really tell you what which one is best for you. It's very individual to your circumstances, it's views on life expectancy, it's whether or not you need lump sums or funds for other purposes that that pension income stream wouldn't be enough for. It's it's beneficiaries and whether you want to cover them, you have an option maybe of um of the pension being paid to a spouse. There's all of these questions, it can be quite complicated. It really is if you if you've got what if you're fortunate enough to have one of these legacy products, it's worth getting financial advice to help you understand your options and the implications of choosing one. Generally, once you've made the nomination, you cannot go back and change it, and that's why it's important. If you intend to apply when you leave employment immediately for the age pension, you will need to have a final balance of your super monies. So, to get that statement from your super fund provider, you can imagine you need the money to be in the super fund. So it's another reason to be proactive to be able to give Centrelink the statement that says what money you've got in your super fund. So, as you can see, setting the retirement date is one thing very exciting, but there are some implications for how you choose to work out your final day of retirement from a financial point of view. There's also implications if you continue to work part-time. I hope this has given you some food for thought as you're leading into making that big decision. So, in terms of an action plan, these are the things that I would do. Firstly, identify your leave entitlements, particularly something like long service, and whether or not you want to work it out or take a lump sum. Check with your employer when you're going to receive your final super contributions and the balance of your account, any transition, so that you can plan it, particularly if it's around the end of a financial year, to make sure you either don't exceed caps or you can maximize the caps in that period. Thanks very much for listening. Our next topic is going to be on downsizing and why you might do it and what options are available to you.