Q: I am age 59 and have a transition to retirement (TTR) income swap strategy in place. Will the Superannuation changes from 1 July 2017 mean the strategy becomes irrelevant and should it be abandoned?
A: 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 whilst you continue to work. The payments can be used to fund additional income, reduce debt, supplement your income needs 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 is currently 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 making salary sacrifice contributions to superannuation) has been gradually watered down due to the reduction in the Superannuation Concessional Contribution cap – which from 1 July 2017 will be further reduced to $25,000.
Also, from 1 July 2017, the investment earnings derived by money invested in the TTR pension will be subject to a maximum tax of 15%. 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.
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 age 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 age 60, the TTR income swap strategy may continue to deliver a boost to your retirement savings whilst reducing your personal income tax by salary sacrificing into superannuation.
Should you turn 60 during the 2017/18 financial year, consideration can be given to delaying your pension payment until after your birthday. Pension payments received after age 60 are tax-free.
When you retire or reach age 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 1 July 2017. If the amount of your TTR pension is less than $1.6 million, then nil 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 age 60 and cease employment. Ceasing employment after age 60 (and below age 64) satisfies a superannuation condition of release. In practical terms, the TTR status can be removed (as noted previously) and the TTR Pension reverts to a Retirement Pension. In order to take advantage of this opportunity you must inform your superannuation fund that you have ceased employment.
Ensure that you maximise the current rules which apply until 30 June 2017; 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 1 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 30 June this year. It is really important to undertake a review of your strategy and understand what the changes mean to your retirement planning.