MONEY MATTERS MONDAY 6TH AUGUST 2018
Pre-Retirement Pensions Still Beneficial
Recently this column talked about salary sacrifice, a very valuable strategy that enables people to reduce the tax they pay and save more for retirement. For people over age fifty-seven currently this can be extended into an even more valuable strategy, known as ‘transition to retirement’ or TTR.
Transition to Retirement
The rules governing TTR have changed making it less attractive for some people depending on circumstances. It remains very useful for others. People don’t have to be retired to convert their super to a pension plan giving them extra income. Anyone over age fifty-seven can do so whether working or not.
Salary sacrifice means directing some of our pre-tax salary into super. It can save a great deal of tax, around a quarter of every dollar we earn, or more. The more we sacrifice the more we save, up to the $25,000 concessional contribution limit (which includes employer contributions).
Why not sacrifice up to the maximum? The main reason is that some people cannot afford it. However if they are over fifty-seven they can start a pension plan with their existing super which will give them extra income, allowing them to sacrifice more salary into super. This is ‘transition to retirement’.
Until June 2017 all earnings inside pension accounts were entirely tax free. So, it made great sense to move super into a tax free environment that also provided increased personal income. This allowed people to save more tax by sacrificing more of their salary into super.
Is this the right strategy for you?
The earnings in pre-retirement pension accounts are now taxed at fifteen per cent, the same as super accounts in accumulation mode. This takes away one of the benefits of TTR, but others remain. If having the pension income allows extra salary sacrifice to occur then additional tax will be saved.
The income that pension plans pay is tax tree if the recipient is over age sixty. If they are younger the pension income is concessionally taxed. In some cases, this may mean the benefits of starting the TTR strategy before age sixty are small. It depends on personal circumstances.
Importantly some people who are still working are eligible to have their pension plans remain tax free, avoiding the new tax. This can be the case if people have retired then later returned to work, if people have changed jobs or ceased a job after age sixty and if they are over age sixty-five.
The rule changes make TTR less attractive for some people, but it is still very beneficial for others. Anyone over age fifty-seven with a substantial amount in super should get personal advice to see if a TTR strategy would work for them.
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