The super reforms impact transition to retirement pensions and the role they could play in pre-retirement planning.
What’s a transition to retirement pension? A transition to retirement (TTR) pension is a pension that has started with superannuation money when you have reached your preservation age8, but have not yet retired.
These pensions can provide a tax-effective source of income to supplement income from employment or self-employment
in the lead-up to retirement.
A common strategy
Many people have implemented a strategy whereby they have:
• arranged with their employer to contribute part of their pre-tax salary directly into super (via salary sacrifice) or made personal deductible super contributions
• transferred some of their existing super in a TTR pension, and
• used the regular payments from the TTR pension to replace the cashflow used to make the extra super contributions. Using this strategy provides the potential to build a bigger retirement nest egg without reducing current income.
Impact of reforms
The super reforms that could impact this strategy from 1 July 2017 include:
• the reduction in the annual cap on concessional (pre-tax) super contributions from $35,000 / $30,000 (depending on age) to $25,000, and
• the increase in the tax paid on earnings on investments held in TTR pensions from 0% to a maximum of 15%.
From 1 July 2017, it’s anticipated this strategy will remain effective for some people, but for others it may not be viable.
You should speak with a financial adviser who can help you assess whether this strategy remains suitable. It is important to consider the changes as your super fund may be eligible for capital gains tax relief depending on steps you take prior to 1 July 2017.
Top up your income when cutting back work Despite the super reforms, a TTR pension can still be effectively used to replace reduced income if you plan to scale back your working hours. For example, if you plan to cut back your working week from five to three days, you may be able to start a TTR pension and draw enough income to compensate for the two days you won’t be working.
By doing this, you’re likely to pay less tax on the income you receive from the TTR pension than you do on your salary or business income. This is because the taxable income payments from a TTR pension attract a 15% tax offset between preservation age8 and 59, and the income payments are tax-free9 at age 60 or over.
If you would like to use a TTR pension to top up your income when cutting back your work, we recommend you speak with a financial adviser.
Owl Financial Management is an Adelaide Based Financial Advice business.