Previously, individuals could not access their superannuation until they had reached their preservation age and a condition of release had been satisfied (which was usually retirement from the work force).
Regulations were introduced in 2005 to give effect to the “Transition to Retirement” (TTR) measure which allows individuals to gain access to their superannuation benefits after reaching preservation age while still working and before a condition of release has been met.
Your preservation age is not the same as your pension age. Your preservation age is the age at which you can access your super and depends on when you were born. You can use this table to work out your preservation age.
The TTR measure allows individuals to commence a retirement income stream (i.e. account based pension) while still working. The retirement income stream commenced is non-commutable, which means that the balance cannot be accessed until a condition of release is satisfied. There is a minimum 4% or maximum 10% yearly pension income limit of the account balance, as at 1 July each year.
Commencing a TTR pension can be very tax effective as income and capital gains are tax free and the pension payments are concessionally taxed for those under age 60. Pension payments become tax free for those over age 60.
A popular strategy used by those who have reached their preservation age and intend to keep working has been to use a TTR pension to in fact increase their overall super nest egg whilst still maintaining their cash flow requirements.
This strategy involves:
- Arranging with your employer to sacrifice part of your pre-tax salary directly into your super fund,
- Convert most of your super into a TTR pension account, and
- Using the regular payments from the TTR to replace the income you sacrificed into super.
By taking these steps, it’s possible to accumulate more money for your retirement, due to a range of potential benefits. For example:
- Salary sacrifice super contributions are generally taxed at up to 15%, rather than at marginal rates of up to 49%,
- Investment earnings in a TTR are tax-free, whereas earnings in a super fund are generally taxed at a maximum rate of 15%, and
- The taxable income payments from the TTR pension will attract a 15% pension offset between preservation age and 60.
See how it works below:
SPOILER ALERT! In the 2016 Federal Budget, the government proposed that from 1 July 2017, earnings from a TTR pension will no longer be tax-free. The earnings will be taxed at up to 15%, the same as if they were in accumulation phase. Whilst this proposed measure does take some of the gloss off the TTR strategy it is still a worthwhile strategy, but in more limited circumstances.
If you’re considering taking advantage of the TTR pension/salary sacrifice strategy, or considering reviewing an existing strategy, then we recommend you seek advice on the merits of such a strategy for your personal circumstances, especially the implications post-30 June 2017.
Are you interested in getting your TTR pension/salary sacrifice strategy reviewed or started? Contact us for your free initial consultation today, one of our friendly advisers would be delighted to speak with you.
Please note: The information provided in this article is general advice only. It has been prepared without taking into account any person’s Individual objectives, financial situation or needs. Before acting on anything in this article you should consider if it is appropriate for you, having regard to your objectives, financial situation and needs.