The Coach: retirement transition

A TTR strategy involves transferring your superannuation balance into a non-commutable account-based pension.

A TTR income stream will still remain relevant to supplement income or even if you are seeking to work less before making the leap into retirement.

I am age 59 and have a transition-to-retirement-income strategy in place. Will the superannuation changes from July 1 make the strategy irrelevant? Should it be abandoned?

A TTR strategy involves transferring your superannuation balance into a non-commutable account-based pension. Payments from this pension can be used to supplement your income while you continue to work. The payments can be used to fund additional income, reduce debt or enable you to salary sacrifice into superannuation (as part of an income-swap strategy). The earnings derived by the money invested in the non-commutable account-based pension are exempt from tax within the fund. Further, if you are aged 60 or over, the income drawn is also tax-free.

The effectiveness of a TTR income-swap strategy (which involves salary sacrificing into superannuation) has been watered down by the reduction in the superannuation concessional contribution cap, which from July 1 will be further reduced to $25,000.

Also, from July 1, the investment earnings derived by money invested in the TTR pension will be subject to a maximum tax of 15 per cent: this is a significant change from the nil tax on these earnings at present. This means the tax effectiveness of the strategy reduces even further.

In other words, the taxation treatment of pension payments received from the TTR pension will remain unchanged. However, the tax effectiveness of the income-swap strategy is significantly reduced due to the tax on the investment earnings as well as the reduction to the contribution cap.

For clients under 60, consideration may need to be given to ceasing the strategy unless you need the funds for basic living expenses or a specific strategy (such as debt reduction).

For those over 60, the TTR income-swap strategy may continue to deliver a boost to your retirement savings while reducing your personal income tax by salary sacrificing into superannuation. Pension payments received after 60 are tax-free.

When you retire or reach 65, the TTR status will be removed and the TTR pension will revert to a retirement pension. You will be subject to the $1.6  million transfer balance pension cap which is a limit imposed on the total amount that a member can transfer into a tax-free pension account from July 1. If your TTR pension is less than $1.6m, then no tax will apply to the investment earnings within the pension account when it converts to a retirement pension.

An opportunity exists when you are over 60 and cease employment. Stopping work after 60 (and below 64) satisfies a superannuation condition of release. The TTR status can be removed and the TTR pension reverts to a retirement pension. To take advantage of this you must inform your superannuation fund that you have ceased employment.

Ensure that you maximise the current rules which apply until June 30: the $35,000 concessional cap and nil tax on the investment earnings within the TTR pension. Other rule changes such as the “catch-up” concessional contribution cap applying from July 2018 could be used to great effect into the future.

A TTR income stream will still remain relevant to supplement income or even if you are seeking to work less before making the leap into retirement.

Best to seek advice from a qualified financial adviser before June 30. It is really important to understand what the changes mean to your retirement planning.

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