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Is Transition to Retirement Still Viable?

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Superannuation law was amended in 2005 to allow people to access their super from preservation age, currently 55, but progressively increasing to 60, without having to retire. It became affectionately known as ‘transition to retirement’ but it actually has nothing to do with retiring.

Once a person reaches their preservation age, they are able to access their super even though they might continue to work on a part-time or even a full-time basis.

There are some restrictions that apply, including:

1. Superannuation can only be accessed as an income stream or pension. That is, the amount of super being drawn cannot be paid out as a lump sum, however the annual income may be paid as a single annual instalment. The investment product that pays the pension is often referred to as a transition to retirement pension (TTR), or transition to retirement income stream (TRIS).

2. The income that may be drawn each year is based on the TRIS account balance. The minimum income that can be drawn is 4% of the account balance, while the maximum is 10% of the account balance.

3. During the life of a TRIS, lump sums cannot be withdrawn from the account, apart from the annualised annual income payment.

In the past, one of the attractions of a TRIS was that the investment earnings achieved by the super fund on the investments supporting the TRIS were exempt from tax at the super fund level. Because the super fund did not have to pay tax, this translated to a higher investment return for the investor.

Unfortunately, this concession was withdrawn for TRISs from 1 July 2017. They are now taxed on the same basis as a superannuation accumulation account. That is, fund earnings are taxed at a rate of 15%, with a 331/3% discount available for capital gains.

Once a person reaches the age of 60, the income they personally receive from their TRIS is tax free in their hands, even though their super fund is still paying tax on the underlying investment earnings.

One of the very popular strategies adopted in the past was for people to commence drawing income from their TRIS and simply enter into a salary sacrifice arrangement with their employer. It was a highly tax advantaged strategy, particularly for high income earners when the superannuation contribution limits were much higher than they are today.

However, not all is lost.

Even though a TRIS does not offer the same tax advantages as it did in the past, they may still play an important part in personal financial planning.

Drawing income from TRIS, particularly if age over 60, may still provide some tax advantages when coupled with a salary sacrifice arrangement or making personal tax-deductible contributions. The general concept of transition to retirement is still relevant where an individual needs to supplement their existing income. This may occur when unexpected expenses arise, a job is lost, or a person chooses to reduce their working hours in order to ‘transition into retirement’ – the original intention for introducing transition to retirement.

Of course, transition to retirement has a downside, the earlier we start drawing down on our super, the greater the risk that we will outlive it.

 

Source: Peter Kelly | Centrepoint Alliance

What will the 2016 budget hold for pre-retirees?

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In recent weeks, the media has been overrun with commentary about what the 2016 federal budget may contain in relation to superannuation.

But this year – things are a little different.

The Australian Federal Government has already departed from convention by bringing the budget forward by one week. The budget is usually brought down annually on the second Tuesday of May. But this year it has changed, and will be delivered on 3 May 2016.

To add an additional layer of complexity to these proceedings – 2016 is an election year. Prime Minister Malcolm Turnbull was quoted in question time today (and at the time of writing this article) that 2 July 2016 is the most likely date for the election.

Over the past ten years a popular strategy employed by many Australians has been affectionately referred to as ‘Transition to Retirement’ (TTR).

Recent media commentary suggests that this strategy may be in the firing line for change, or even abolition, in the budget.

So – let us unpack TTR and see what all the fuss is about.

Back in 2005 Australia was suffering from a skills shortage. As a way to slow down the departure of skilled Australians from the workforce the government introduced legislative reforms that enabled people to progressively transition in to retirement, and allowed them to access superannuation so they could supplement their income.

TTR is simply an opportunity that allows a person to access their superannuation benefits in the form of a pension, rather than a lump sum, once they reach their preservation age. You don’t have to have retired, or even to have reduced your working hours, in order to commence a TTR pension.

As a result of the TTR opportunity being introduced – many people continuing to work full-time took advantage of the opportunity to start drawing upon their super, and consequently used the extra income for other purposes.

If the current rumours suggesting that the government may abolish TTR prove to have substance – I believe it would be regrettable. A far more palatable response would be to limit the access to TTR to those who are genuinely transitioning into retirement.

That is – I would recommend restricted access to TTR to only those who are working less than approximately 30 hours per week.

 The reason why the government may be looking to amend the TTR pension is not due to its original premise – but rather – it is likely to be because of a strategy that is run in conjunction with TTR.

For many financial advisers and their clients, TTR is the marriage between TTR (accessing super from preservation age) and a second stand-alone strategy; making additional contributions to superannuation under a salary sacrifice arrangement.

This results in nice little piece of tax arbitrage – particularly for people aged 60 and older.

And therein lies the problem!

I don’t believe the government is concerned about TTR per se, but my guess is that they are alarmed about the ability of individuals to make significant contributions to superannuation (up to $35,000 this year).

Both sides of politics are concerned that the current, concessionally taxed, superannuation environment favours the wealthier members of our community, and that tax concessions would be better directed towards those in greater need.

To put this in perspective – when a person sacrifices part of their wage to superannuation, the contributions are taxed at a rate of 15 per cent. If that money was paid as a salary it would be taxed at the person’s marginal tax rate which may be as high as 49 per cent.

From a government’s perspective the simplest way to manage the perceived tax advantages that arise from a TTR/salary sacrifice strategy would be to reduce the amount that may be contributed to superannuation under a salary sacrifice arrangement.

This could be achieved by simply reducing the cap on concessionally taxed superannuation contributions.

But who knows what a government might do? The answer will no doubt be revealed over the course of the coming weeks in Australian politics.

Please note: Readers who have reached their preservation age should speak with their financial planner as a matter of urgency. If a TTR strategy is appropriate it might be advisable to have it in place before 3 May 2016.

 

 

Source | Peter Kelly – Technical Advice

Centrepoint Alliance