Transition to Retirement Pensions may be on the way out
THERE are rumours that transition to retirement pensions (TTRs) may be attacked in the May budget.
They were introduced in 2006 in tandem with the Howard-Costello reform of the superannuation system.
Many older workers wanted to cut down on their hours and were happy to accept a reduced wage for doing so, but they did not want to give up work completely. The problem was access to super - employees cannot access their super until preservation age unless they are prepared to sign a statement that they are permanently retired.
TTRs solved the problem and enabled the 55-and-overs to have their cake and eat it too. Australians could access their superannuation as an income stream while continuing to work.
What made TTRs particularly attractive was the ability to continue contributing to super while drawing a tax-free income from the fund; it enabled anyone adopting the strategy to take advantage of the difference between the 15% tax on contributions and their marginal tax rate.
Think about Jack, a 60-year-old who earns $105,000 a year, which puts him in the 39% tax bracket. His employer is required to contribute $9975 (9.5%) to super for him, and he is able to contribute a further $25,025 to super as a concessional contribution.
After taking advice, he decides to increase the amount he salary sacrifices to super to $25,025. This will reduce his take-home pay by $15,266 a year. The contribution will incur a 15% entry tax of $3754, but he still enjoys the experience of having his superannuation boosted by a net $21,2713.
He is $6006 better off - it's a no-brainer!
But he can put even more money in his pocket by starting a TTR. He would still salary sacrifice at the same level but he would start to draw a pension from a superannuation fund. Immediately that starts, his superannuation fund ceases to pay tax, which means higher after-tax returns.
It's possible that a pay cut of $15,266 a year net would leave the family finances a bit short. If that's the case he could simply use part of the income from the TTR to make up any shortfall - if his budget can cope with his reduced income, he could contribute straight back into superannuation as a non-concessional contribution, on which there is no entry tax.
My advice is to start a TTR as soon as possible if you are eligible - after May it could be too late.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: firstname.lastname@example.org