Q. For the past 2 years I have adopted a Transition to Retirement Allocated Pension (TTR) strategy. I have targeted my Salary Sacrifice Cap to get as much into Super as I can. Last year I sold a property and invested the net proceeds onto Superannuation. As a result I have more than $500,000 of personal contributions sitting in the fund. With the Budget changes to TTR is there any point continuing with the strategy? I am nowhere near the $1.6 million limit but I am underfunded in terms of our retirement income goals. I am 62 and plan to retire at 65. What am I to do?
A. A TTR strategy involves transferring your Superannuation balance into an Account Based Pension (Allocated Pension). The Allocated Pension payments 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. The money invested in the Allocated Pension is exempt from tax within the fund. If you are over 60, the income drawn is tax free.
A TTR strategy is an extremely tax effective mechanism to save for retirement . Perhaps too effective and that is why the Government are looking to make changes.
The impact of the Budget changes for pre-retirees is hard to quantify until we see legislation. Arguably there are 3 major announcements from the Budget that will impact your retirement planning.
Under the proposed changes, effective 1 July 2017 earnings within an Account Based Pensions supporting a TTR strategy will no longer be tax exempt. Earnings will be subject to the same 15% earning tax applicable to a Superannuation (accumulation) fund.
The reduction in the Concessional Contribution cap from $35,000 to $25,000 will limit the amount of money you can Salary Sacrifice to Superannuation. This will reduce your ability to use Superannuation to save for retirement. This change takes effect from 1 July 2017, so you have this financial year and next financial year to take advantage of the current higher caps.
The Government proposes to replace the Superannuation Non-Concessional Contribution Cap (currently $180,000 a year or $540,000 every 3 years) with a lifetime cap of $500,000. Contributions received in excess of this amount will need to be removed or subject to penalty tax.
This cap is proposed to take effect from 3 May 2016 (Budget night). The cap will take into account all Non-Concessional contributions made on or after 1 July 2007. However contributions made before budget night will not result in an excess to the cap. As you made your personal contributions prior to Budget night you are ok to leave this money in the fund. Your problem is that under the proposed changes you can’t add any more personal contributions to the fund.
So in summary your Salary Sacrifice limit has been cut by $10,000, you can’t make any further personal contributions and the earnings within your Allocated Pension are no longer tax free. On a positive note the Allocated Pension payments you receive will continue to be tax free as you are over age 60.
Under the current law, when you have a TTR Pension, you are restricted to drawing 10% of your Account balance as an income payment. This restriction disappears when you satisfy a full condition of release; for example your retire or you reach age 65. The proposed changes to tax on income within a TTR Account based pension do not affect Account based Pensions if a condition of release is met. So if you have a TTR Account based Pension and you meet a condition of release, then presumably the earnings within the fund would become tax free. How and when this is triggered is currently unclear.
Superannuation limits apply to individuals, so if you have the capacity to save more for retirement and you can no longer use the Superannuation system, then you can invest into your Spouse’s Super. Alternatively invest outside the Superannuation system.
It is important to recognise that at this stage the changes announce in the Budget are proposals. These proposals will require the passage of legislation before they are implemented. It is impossible to be definitive about the consequences until we receive the fine detail but suffice to say, provided you don’t breach Contribution caps or limits, Superannuation remains a tax effective way of funding your retirement.