One of the big changes to superannuation on budget night involved Transition to Retirement (TTR) pensions. Are they still a worthwhile strategy going forwards?

To recap, a TTR strategy involves salary sacrificing additional amounts of your income into superannuation, and then starting a pension to pay you money to offset the amount you have reduced your income by. The goal being to have additional money contributed to super whilst not experiencing any reduction in your back pocket. The benefits of a TTR strategy were:

• The earnings on the assets inside a TTR were tax free (vs. 15% in superannuation)
• The salary sacrifice to superannuation reduced overall tax
• The pension payment is taxed at a lower rate (by virtue of a tax rebate) or tax free if over 60.

The proposed changes that will impact TTR strategies:

From 1 July 2017, assets inside a TTR pension will be taxed at 15% (previously 0%). There will be no changes to the tax on pension payments.

In addition to this, there will be a reduction in the concessional contributions cap from $35,000 to $25,000, meaning less money can be contributed to super by way of salary sacrifice.

The Results

Modelling shows that the benefits of a TTR strategy for clients under age 60 are now minimal, or potentially negative, compared with a typical range of $1,500 to $4,000 per annum.

Over 60’s however may still see some benefit in the strategy, although the benefits are reduced (generally by half) under the new proposals.

To sum up, the proposed changes will alter the benefits of TTR’s dramatically, and all strategies will need to be reviewed thoroughly before the proposed 1 July 2017 implementation date.

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What is it?

People who have reached their preservation age and are still working are able to access their superannuation and start a transition to retirement (TTR) strategy. Your preservation age is the earliest time at which you can start to access your superannuation and currently ranges between 55 and 60, depending on your date of birth.

How it works

A portion of your existing superannuation account is converted into an income stream (a TTR pension account) whilst you’re still working. The pension account pays you regular payments. You can then salary sacrifice part of your salary and wages back into your superannuation account and still have the same amount of money to cover your cost of living. The diagram below gives you an idea as to how your money moves when using this strategy:

As always, there are a number of rules and limitations, and the amount of benefit in this strategy depends on a number of factors. However, it does become more attractive once you are over 60 years of age and the income from the pre-retirement pension is tax free.

Ask us to run some calculations for you the next time you come in for a review so you’re fully aware of how this strategy works.

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