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Is A Transition To Retirement Strategy Still Worthwhile?
BY FRANK PAUL - 12/05/2017 | VIEW MORE ARTICLES BY FRANK PAUL

From 1 July 2017, earnings on assets supporting a transition to retirement (TTR) pension income stream will no longer receive a tax exemption; further the concessional contribution cap will be reduced. In this article, we consider those situations where TTR remains a worthwhile strategy, even if less effective.

The most common application of a TTR pension (also referred to as a Transition to Retirement Income Stream - ‘TRIS’; or Transition to Retirement Pension - ‘TRIP’) is allowing a super fund member to continue to work, salary sacrificing part of their salary, whilst commencing a TTR pension at the same time; using pension payments to meet expenses. Such a strategy provides two benefits:

  1. Earnings on assets within the super fund used to support the TTR pension are exempt from tax.
  2. The TTR pension payments are likely to be more concessionally taxed than the salary they replace.

With the first of these benefits being removed under the new super rules, the tax savings of a TTR strategy is reduced.

What is changing?

The table below summarises the key aspects impacting on TTR strategies of the Governments’ Superannuation Reform Package that received royal assent on 29 November 2016 and are now law:

Item Up until 30 June 2017 From 1 July 2017
Earnings on assets supporting TTR pensions within a super fund Tax exempt Taxed at a maximum of 15%, on par with the accumulation phase of super. This will apply regardless of the date the TTR pension commenced.
Concessional contribution cap (mandated and employer contributions, including salary sacrifice) $30,000 or $35,000 p.a. depending on age $25,000 p.a. regardless of age
Pension payments received by fund member Age 60 and over – tax-free*
Under age 60- taxable at marginal tax rate less a 15% tax offset*
Tax-free component is not taxed, regardless of age
No change
Division 293 income threshold (30 per cent tax on super contributions of higher income earners) $300,000 threshold $250,000 threshold
Lump sum payment from a pension (partial commutation) Counts towards pension payment and taxed as such. Not included in pension payment and taxed as a lump sum. Will also be debited from transfer balance account (commences 1 July 2017).

The intent of the above change is to ensure that TTR pensions are not accessed primarily for tax purposes but for supporting individuals who remain in the workforce.

It is important to reiterate two key items in the above table that aren’t changing:

• Earnings from other retirement phase income streams (such as account based pensions) will continue to be tax-free.
• The tax treatment of pension payments from the TTR pension will not be changing

Is a TTR strategy still worthwhile after 1 July 2017?

Whilst the tax benefit is reduced from 1 July 2017, TTR pensions may still make sense if you:

  • are transitioning from full-time to part-time work and require the pension income to supplement your income
  • do not meet a full condition of release to access your super otherwise
  • are over age 60 and salary-sacrificing employer super contributions into your super fund and drawing a TTR pension to replace income lost through salary sacrifice
  • are under age 60 and have mainly tax free-component super benefits in your fund, which means most of the pension payments would be tax free
  • are using the income from a TTR pension to pay down debt or super equalisation with a spouse

Further, the ability for employees to make personal concessional contributions from 1 July 2017 without having to meet a 10 per cent test allows those who were previously unable to make concessional contributions to take advantage of a TTR strategy.

In addition, due to the concessional cap reduction, the maximum amount you could use to commence a TTR strategy has significantly reduced under the new rules.

Meeting a condition of release

If you have an existing TTR pension and now meet a full condition of release to access your superannuation, this will enable the commencement of a non TTR-pension (such as an account based pension) which will allow the tax-free status of earnings to continue, if converted prior to 1 July 2017.

A retirement condition of release is met by one of the following:

  • preservation age is reached and an arrangement of gainful employment has come to an end; and the trustee of the fund is reasonably satisfied you never intend to be gainfully employed for 10 hours or more each week
  • you are over age 60 and have ceased a gainful employment arrangement (e.g. by changing employers) since that age
  • you have reached age 65.

CGT relief to comply with new provisions

Where a trustee of a complying super fund is required to move an asset from retirement phase to accumulation phase as a result of the removal of the earnings tax exemption for TTR pensions (or the transfer balance cap), the trustee can elect to reset the asset’s cost base to its current market value. This ensures that only capital gains that accrue after the asset was transferred back to the accumulation phase will be assessable.

Different rules will then apply to determine whether a trustee can apply the relief in relation to a particular asset depending on which segregation method the fund uses. However, in all cases CGT relief can only apply to assets held by the fund throughout the pre-commencement period, i.e. from 9 November 2016 to 30 June 2017.

The changes discussed in this article apply to both existing TTR pensions, and new TTR pensions commenced on or after 1 July 2017- no grandfathering will apply.

It is important to review an existing TTR strategy prior to 1 July 2017 to determine whether they should be altered or discontinued. At a minimum it is important to review the level of salary sacrifice contributions to consider the revised $25,000 annual concessional contribution cap; and whether you have met a retirement condition of release, thereby allowing full access to your super benefits and commencement of an income stream that does offer an exemption on its returns.

 



View More Articles By Frank Paul

Frank Paul is Chief Operating Officer & Head of Advice Services with Spring Financial Group. Frank has over 20 years' experience in financial planning and investment advisory.

Frank has extensive experience in private client advising and the management of financial services operations. Frank is actively involved in the recruitment and management of advisory personnel and heads the advisory panel. He holds a Master of Commerce (Financial Planning) and a Dip. Financial Planning and has authored literally dozens of financial education publications.


 

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