Noel Whittaker 22 January 2017 Sunday Times
Last February I raised the possibility that transition to retirement pensions (TTRs) would come under attack as part of changes to super.
It’s a forecast that proved correct, with the May budget making substantial changes.
The big question now is whether they are still an effective wealth-building tool.
The answer is an unequivocal YES, even though their benefits have been reduced.
The essence of a TTR is that you start a pension from your super fund once you reach your preservation age.
This gives you partial access to your super, even though you have not satisfied a condition of release, such as retirement, which would enable you to withdraw your funds when you wished.
A bonus was that your super fund became a tax-free fund once the TTR commenced. This meant higher after-tax returns.
Unfortunately, the ability to have a tax-free pension fund in conjunction with a TTR has been taken away.
The good news is that a TTR still gives you access to your super while you are working, and also lets you take advantage of the difference between the 15 percent tax on contributions to super and your marginal rate.
Anybody receiving a TTR before age 60 will pay tax on the income stream at marginal rates less a 15 percent rebate; for anybody 60 and over the TTR is tax-free.
Think about a person aged 60 who is on $100,000 a year, receiving $9,500 a year in employer super, and who has $300,000 a year in super. Under the rules that come into force on July 1, when the concessional cap reduces to $25,000 a year, they will still be able to contribute $15,500 a year to superannuation using salary sacrifice. [Note: Some Government employees may be able to contribute much more]. The contributions tax would be $2325, which is much less than the tax of $5850 they would incur if the money was taken in hand. However, they may not be able to maintain their lifestyle if their salary is reduced by a net $9455 a year ($15,500 less tax of $6045).
This is where the TTR becomes a handy tool, because it enables them to start a pension from their super fund to make up their cash shortfall and re-contribute $2545 as a non-concessional contribution on which no tax is payable. Look at the outcome. They have maintained their net take-home pay and have added $3720 to their super ($15,500 voluntary contribution minus $2325 contributions tax minus $12,000 TTR + $2545 after-tax contribution). It’s money for nothing.
Even though I strongly believe your super should be preserved until you retire, a TTR offers a lifeline for people who are strapped for cash.
Think about a person aged 60 with $400,000 in super who wants to continue working but has problems making mortgage payments because they had a financial calamity. They can’t access their super until they retire, or turn 65. However, they could start a TTR of 10 percent of the super balance, the maximum allowed. This would provide a tax-free income of $40,000 in the first year and go a long way to solving their problems. When the crisis is over, they could stop the TTR, or use the strategies above to increase contributions without reducing take-home pay.
There are still some great strategies for those who take good advice.