By Neale Prior, The West Australian 9 May 2016
Transition-to-retirement (TTR) schemes remain attractive for those whose primary reason to start one is to wind down –not save tax.
TTR schemes involve people cutting back hours as they “phase in” retirement and supplementing their lower earnings by drawing down on their super.
People in TTR have the option of topping up their nest egg by salary sacrificing back into their super fund – this also saves on tax.
The May 3 Federal Budget contained measures to curtail that tax win.
From 1 July 2017, the Government is proposing a 15 percent tax on the earnings of funds supporting pensions.
Cutting the concessional contribution cap from $35,000 to $25,000 has removed some tax arbitrage.
However, people over 60 can still make tax-free withdrawals of between 4 percent and 10 percent of their pension nest-eggs each year.
TTR recipients aged 56 to 60 are effectively taxed on their pension at a 15 percentage point discount to their marginal rate.
While the tax advantages of starting a TTR at 56 are questionable, super fund members aged under 60 should look at commencing a TTR pension where they need the money.
Cash is cash, whether you’re going to get a tax advantage or not.
Despite the Budget changes, a TTR still makes sense for people forced by economic circumstances to take a lower-paid job or who were facing financial difficulty.
And someone cutting down working hours will still enjoy solid tax savings under the new rules while harnessing TTR’s income replacement and tax powers.
A person with $300,000 in super and earning $100,000 a year could go down to four days a week and maintain roughly the same take-home pay of $73,000 by drawing a TTR pension, replacing some of the used super with salary sacrifice and employer contributions.
Their overall tax bill may be reduced by as much as $9,000 under the new rules, compared with potential tax savings exceeding $13,000 if the earnings in the pension fund were not taxed.
With TTR, our worker can choose to draw the full $30,000 pension.
They might use it to pay the mortgage or make an after-tax contribution to a new super fund in accumulation mode, reducing tax on any death payout.
Either way, our worker’s scope for more tax savings by salary sacrifice has been cut.
On top of the boss’ $7,600 compulsory super contribution, the maximum sacrifice has been cut from more than $27,000 a year to just over $17,000.
If our worker were to stay full time, potential tax savings have been slashed thanks to the $25,000 concessional cap and the new earnings tax.
The bigger the profit, the bigger the tax.
However the changes are unlikely to influence decisions by people TTR primarily to replace income, not avoid tax.