Not recommending a transition to retirement pension

Transition to Retirement Pensions (TTRs) are available to any person over the age of 55 who wishes to – or must – keep working. They have been around for quite a while, but they are still under-represented in many SOAs.

Read one or more of Trish Power’s excellent articles on TTRs here.

Under the terms of a TTR, a member must withdraw between 4 and 10% of their benefits each year. Once they do this, income generated by the assets used to fund the pension are no longer taxed. Thus, if the entire super benefit is used to finance the pension, the super benefits are no longer taxed.

In addition, for clients over 60, the pension income is not taxed in the hands of the recipient.

Basically, for any client with $300,000 or more in super and who is still working at the age of 60, a TTR is almost always a good idea. A simple strategy is for the client to commence the TTR, and to use the pension receipts to either augment their salary or wage income, or, if the salary or wage amount is high enough, to offset an increase in deductible super contributions.

For example, a client in the 30% tax bracket needs only to give up $14,000 in cash flow to fund $20,000 in extra super contributions. These contributions are still subject to tax upon arrival into the super fund, but only at the super tax rate of 15%. This means that the client withdraws $14,000 from the super fund but replaces it with $17,000 in new money, while also enjoying the fact that earnings on the existing super benefits become untaxed.

Obviously, the benefits become even greater for clients with a higher marginal tax rate. A client in the top tax bracket of 45% makes a guaranteed return of 30% of any additional amount sacrificed into super (the 45% marginal tax rate minus the 15% super tax rate). Combined with the negated tax on the super fund’s earnings, the annual saving to a wealthier client can easily top $10,000 – meaning that this simple strategy will go a long way (probably actually the whole way) towards paying the financial adviser’s fee.

A TTR can also be especially beneficial for SMSFs with any substantial capital gains tax liabilities. Those SMSFs can establish a TTR before realising the capital gain and thereby avoid paying tax on that gain. The critical point in time is when the capital gain is realised, not when the asset was purchased. If that time comes after the commencement of the TTR, the tax rate of 0% applies.

The Dover Group