SCC Chartered Accountants

Planning To Retire In July

Those planning to retire in July will now be preparing for the days after they receive their gold watch. How should they plan their retirement finances?

Retiring in July allows unused leave payments to be taken in a new financial year when taxable income should be much lower. Less tax will be paid on them than if taken late in the financial year.

There are many considerations in constructing a retirement plan. It is usually best to pay off all non tax-deductible debts. Money should be allocated to outstanding home, car or personal loans, and credit card debts. Some well-off retirees may retain investment loans.

What other spending is planned? People often buy new cars, renovate kitchens or bathrooms or take major overseas trips. Spending on these things may or may not be appropriate, depending on the retiree’s total savings position and income expectations.

If such spending will reduce the retiree’s future living standards it should be limited. The suit should be cut to fit the cloth. Professional advice can help assess this.

Several criteria will drive the selection of retirement investments. The most obvious is the need for adequate income to live on. Another is whether the retiree can qualify for any pension benefits, and how to maximise them.

It will also be important to minimise income tax in retirement. Finally there is the challenge of coping with inflation. The cost of living will rise in the future so income will need to increase. Some level of capital growth will be needed.

With these issues in mind all existing investments should be reassessed. Will they be suitable? Residential property may not pay enough income. Rental yields after expenses are mostly 3 per cent or less at present.

Shares paying low dividends may be unsuitable for the same reason. Too much in interest bearing deposits may mean extra tax to pay and no growth to counteract inflation.

Superannuation related investments have advantages. People are tempted to cash in their super but it is rarely the best option. Normally rolling super over to some form of retirement income stream will be best. It may also pay to add to super from other savings.

There are generous tax incentives with retirement income streams. Earnings on pension and annuity funds are tax free and payments to the retiree are very leniently taxed. With careful planning most retirees pay no income tax.

Annuities provide a guaranteed income at a fixed rate but the capital is inaccessible and there is usually no residual value on death.

Superannuation pensions are popular. They give the retiree full flexibility in choosing the underlying investments and varying their income payments. On death the remaining balance goes to the retiree’s estate or beneficiaries.

Often selecting the optimum combination of different retirement income investments will be the key to the ‘perfect plan’. The complex calculations may require the help of a professional adviser.

Self-employed retirees with companies and family trusts may find them less useful and best wound up.

Retirees should review and update their wills. It may be wise to include a testamentary trust clause, to benefit grandchildren for example. Super and pension fund death benefit nominations should be reviewed to minimise tax for the beneficiaries on death.