Clients often read about Transition to Retirement or TTR and want to know if it can help them, and given the recent changes to super from the start of this financial year whether it still works. Here’s a summary of how it works, and who may benefit.
TTR refers to people converting their superannuation into an income stream (usually called a pension, but not to be confused with Centrelink’s Age Pension), before they retire. Previously you generally had to be retired or above age 65 to start a pension from your super, but the Howard Government brought these changes in to allow people to scale back their working hours rather than retire outright, and to top-up their reduced income from super via a pension.
This presented an opportunity for people over 55 to potentially save tax by drawing income that was either tax-free if they were over 60, or may be subject to a 15% tax-offset under age 60. It also had the added bonus that investment earnings were tax-free in the pension, rather than taxed at 15% (which applies in super). So although it was designed to top-up people’s income as they reduced their working hours to transition into retirement, it became popular with people over 55 who were still working full-time but wanted to save tax.
Once they had a tax-free or lower-tax source of income, such people could potentially contribute their pre-tax salary into super, called salary-sacrifice, and those contributions would be subject to a flat contributions tax rate of only 15% rather than their full marginal tax rate (which may be up to three times as high depending on their income). Back when Peter Costello was treasurer, these contributions into super could potentially be as high as $100,000 per year, so some people were able to save many thousands of dollars in income tax every year.
This had negative consequences for successive governments’ tax revenue – meaning it resulted in the government being paid less tax than it otherwise would have, and so since that time, the various treasurers Australia has had have made several changes to the rules, and most recently on 1/7/2017 the amount that can be contributed to super as a Non-Concessional Contribution (ie before paying income tax) was lowered to $25,000 per year – and this cap includes your employer’s compulsory contributions.
Also, investment earnings in a TTR pension are now taxed at the same 15% rate as super, rather than being tax-free. That’s why people who may have saved thousands of dollars in tax several years back are asking if it is still worthwhile today, and people who are only becoming eligible to start now are asking is there any point?
AS always, the answer depends on your personal financial position – so seek advice specific to your own circumstances. But while the opportunity to save tax is reduced, some people may still save a significant amount, so talk to your financial adviser to find out how much you might save.
Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information. The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. _______________________________________________________________________
Mark Plaskitt is a Certified Financial Adviser at MLC Advice Pennant Hills, and has worked in financial advice for over 13 years.