NewsBite

Last-minute superannuation winners and losers

Impending superannuation changes take the gloss off retirement transition schemes.

Treasurer Scott Morrison.
Treasurer Scott Morrison.

As the market works its way through the federal government’s proposed superannuation changes, more than 500,000 Australians with transition-to-retirement schemes are having to rethink their strategies.

From July next year, people with transition-to-retirement schemes, who are aged between 56 and 64, will still be able to use them to take out money from their super and keep working.

This can range from between 4 per cent and 10 per cent of the fund depending on their circumstances.

After age 60, the money they take out is tax-free.

They can also use this extra cash to recontribute to a new super fund either on a concessional or post-tax basis.

But the tax benefits will be cut as earnings on the fund paying out the transition-to-retirement income stream (TRIS) will be taxed at 15 per cent rather than the current 0 per cent.

While this doesn’t rule out the attraction of the scheme entirely, particularly being able to access super while working, it will make it a lot less financially attractive for many people.

People’s ability to recontribute a bit more to super will also be affected by the lower concessional cap — down from up to $35,000 a year for people over 50 and $30,000 for people under 50 to a flat $25,000 a year from July 1 next year.

TRIS schemes have been promoted by many advisers and the industry super funds as a legitimate way to minimise tax and allow some access to extra income ahead of retirement.

Most people with TRIS who are recontributing are doing it on a concessional basis — doing a bit more salary sacrificing.

But those with larger funds who were recontributing substantial amounts on a post-tax basis, who had hit the $500,000 lifetime cap announced in the May budget, have been given some breathing room with the latest announcements from Scott Morrison.

The recent policy changes (assuming they are passed into law) now reopen that window, allowing people to recontribute as much as $180,000 to super post-tax this financial year (or $540,000 over three years).

This will be cut to $100,000 a year from July 1 next year (or $300,000 over three years). But the big difference is that once the person has a total of $1.6 million in all their super accounts, they can’t make any more post-tax contributions to super at all.

Situations will differ widely from individual to individual.

Collateral damage

One woman reader has highlighted another problem for some ­people with TRIS under the changes.

The woman had retired and was on a superannuation pension where earnings are tax free.

She went back to work part time where she began a new superannuation account. After a time she converted that to a TRIS.

Her super fund suggested that she roll both funds into one for administrative simplicity and lower fees as in both cases they were taxed at zero income tax.

But from July 1 next year income in the TRIS account will be taxed at 15 per cent.

And with both funds now rolled into one, the woman faces the prospect of having to pay 15 per cent tax on the earnings of the full fund while part of it would have been tax free had she retained two separate funds.

Unfortunately, the fact that she is still working means she can’t undo the pooling arrangement and thus faces 15 per cent tax on the full fund from July next year.

She says she is now forced to retire as of June 30 to ensure that the income from the fund is tax-free.

“The proposal to tax all TRIS pensions retrospectively and unfairly captures the victim’s preceding, innocent and perfectly legitimate decisions to roll or amalgamate their pre-existing tax free pension with their later, and usually smaller, TRIS pension,” she suggests.

“The tax I face on the earnings of my super balances will exceed my part-time earnings, so the changes will force me to retire on June 30.”

Adviser Melinda Bendeich from Matrix Planning Solutions, part of the Clearview group, says that she does not expect this to apply to most people with TRIS.

She says most people in this circumstance would have kept two separate pensions running.

“But some products may not have this flexibility. In this case it could mean the person is forced to retire to convert their TRIS pension into a standard pension with tax-free income,” she says.

Loading up super fund

More broadly, Bendeich says her clients are now reassessing the advantages of the TRIS strategy as well as the latest announcement on post-tax contributions.

She says some people close to retirement are now looking at taking advantage of the government’s announcements this month to put up to $540,000 into their super fund post tax while they can this financial year.

She argues that TRIS will still be attractive for some people, particularly those over 60, as it allows them to access their super while they are still working.

Pumping extra money into super this financial year has to be done with the full knowledge that by July 1 next year, only $1.6m can be rolled into a tax-free retirement account.

Any money already in super above this amount will have its income taxed at 15 per cent.

Bendeich argues that for many people this is still an attractive option, particularly for those with the money already in super.

The transition to retirement she argues, could still benefit some people but the combination of the 15 per cent tax on earnings and limits on recontribution will force people to think twice about the TRIS system.

The full impact of all the changes announced this year will vary from person to person.

Our reader’s situation may not be too common, but it is an example of how different people are finding themselves unexpectedly hit by the changes with little room to move, particularly those close to retirement.

Glenda Korporaal
Glenda KorporaalSenior writer

Glenda Korporaal is a senior writer and columnist, and former associate editor (business) at The Australian. She has covered business and finance in Australia and around the world for more than thirty years. She has worked in Sydney, Canberra, Washington, New York, London, Hong Kong and Singapore and has interviewed many of Australia's top business executives. Her career has included stints as deputy editor of the Australian Financial Review and business editor for The Bulletin magazine.

Add your comment to this story

To join the conversation, please Don't have an account? Register

Join the conversation, you are commenting as Logout

Original URL: https://www.theaustralian.com.au/business/wealth/lastminute-superannuation-winners-and-losers/news-story/cb04aa137bf4ae60ad14a9e3b8c2aa28