People who have reached age sixty and are still working can start a pre-retirement pension. It will give regular income payments from the person’s super account.

Why would anyone start a pension before retiring? It will draw money out of their super, reducing the balance just when they are trying to build it up as much as possible before retiring.

Not only that, there is no automatic tax saving. The 15 per cent tax on the earnings of super accumulation accounts continues to apply to pre-retirement pension accounts. Pension account earnings only become tax free when the members retire or reach age 65.

In practice many people do convert their super to pre-retirement pensions in the latter years of their career. The main reason is to provide extra cash inflow.

The regular payments to the member are tax-free income, so quite desirable. The most common use of this income is to fund extra salary sacrifice super contributions.

That sounds strange – take a pension, draw regular payments out of your super, so you can put more money back into your super. It may be odd, but it works. It reduces tax paid, meaning more can be saved.

The regular payments from the pension account are tax-free. They can be used to meet some of a person’s living needs, which then allows them to sacrifice more of their salary into super.

Salary sacrifice payments into super are deducted from pre-tax pay. No income tax is paid on the salary sacrificed, so medium income workers save 32 per cent. After deducting the 15 per cent super contributions tax the net saving is 17 per cent. Those in the top tax bracket save a net 32 per cent.

This is known as a transition-to-retirement strategy. It is attractive because it enables people to build their super faster.

Pre-retirement pension income can also be used for other purposes. Some people over age sixty may be working because they still have a mortgage they need to pay off before they can retire. Pre-retirement pension income can be used to increase mortgage payments.

Pre-retirement pensions can be taken to give extra cashflow that will allow extra borrowing for business purposes. For example a person with a small farm may wish to buy the farm next door to help make the property more viable. The extra income can be used to fund any business purchase.

Some pre-retirees may have adult children who aren’t as independent as others or have special needs. A pre-retirement pension can create extra cashflow to help support that child. It won’t help build the parent’s super or reduce their debts, but it may be very beneficial for the family.