Q: I am age 59 and have a transition to retirement strategy in place. Will the changes from 1 July 2017 mean the strategy is not relevant anymore?
A: The effectiveness of the Transition to Retirement (TTR) Strategy has been continually watered down over the past 10 years due to the reduction in the concessional contribution cap of $25,000 regardless of age and abolition of the tax-free investment earnings contained within the TTR pension.
What is a Transition to Retirement Strategy? Allows you to supplement your salary and maintain a comfortable lifestyle if you have reached your preservation age. You can also use the strategy to save tax and boost your super before you retire by salary sacrificing into superannuation and receiving pension payments from a Transition to Retirement pension.
From 1 July 2017, the investment earnings contained within the TTR pension will be subject to a maximum tax of 15%. This is a significant change from the nil tax on earnings at present. This means the tax effectiveness of the strategy reduces even further.
The taxation treatment of the pension payment from the TTR pension will remain unchanged. However, for people under age 60, the tax effectiveness of the strategy to boost their retirement savings whilst working full time will be significantly reduced. This is due to the imposition of the tax rate of 15% on the investment earnings within the TTR pension.
Consideration will 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). Undertaking a review and seeking advice to determine what impact these changes will have to your retirement planning is essential.
For those people over age 60, the TTR strategy might 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. It is important to note that the delay in the pension payment until after your 60th birthday will change the imposition of the tax rate of 15% on the investment earnings within the TTR pension.
You might be wondering what will happen to your TTR pension when you retire. The TTR status will be removed, and 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 have in the tax-free pension account from 1 July 2017. If the amount of your TTR pension is less than $1.6 million, the nil tax will apply to the investment earnings within the pension account.
If you are over age 60 it is important to note the significance of changing employment. Changing 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) but you must inform your superannuation fund.
So what is next?
The strategy will still remain relevant to increase pre-tax salary sacrifice contributions into superannuation and receive pension payments to supplement income or even if you are seeking to work less before making the leap into retirement.
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. Best to seek advice from a qualified financial adviser and if you’re using the strategy, it is important to undertake a review in context of what is means to your retirement planning.
Article written by Damian Hearn, WealthPartners Specialist Adviser