Many individuals nearing retirement are looking for ways to boost their super savings. With the introduction of government’s simpler super reforms in July 2006, it is now possible to do exactly this by making the most of transition to retirement (TTR) rules.
You can take advantage of the transition to retirement rules by salary sacrificing part or all of your employment income into super, while at the same time beginning an allocated pension from your existing super funds. The pension provides an income while you continue working, and is tax free for individuals over 60, and carries a 15% tax rebate if you’re aged between 55 and 60.
At the same time you’re getting considerable tax benefits from salary sacrificing your income into super, paying only 15% contributions tax, as opposed to PAYE income tax rates of up to 45%.
So at what age is this strategy of most benefit? Most advisers agree that it best suits someone aged 60 or more, or at the very least age 55. Between now and 30 June 2012 an individual can take a pension income stream tax-free and make contributions (both salary sacrifice and employer contributions) up to $100,000 per annum.
To begin a TTR strategy, you must have reached ‘preservation age’, in order to access super benefits. This is age 55 if you were born before 1 July 1960, phasing to age 60 for those born after 30 June 1964.
Due to the reduced cash flow, anyone thinking about the TTR strategy should have no debt.
Not all super fund providers offer TTR arrangements.
The fees of setting up a TTR arrangement should be minimal – and if you are able to set up the scheme yourself, no costs should be incurred at all. Once you reach retirement age, the commutation of the TTR pension back to accumulation phase is also allowed and should be at a minimal cost.
Before deciding on whether to set up at TTR strategy, you firstly have to find out what your pension is worth, then check the numbers on your living costs and see if the after-tax income of the pension will cover your needs. Then you need to make an application to the super fund for the pension to commence, and notify your payroll office of your decision to salary sacrifice to superannuation.
The TTR strategy has the Australian Taxation Office stamp of approval, which has stated that it will not apply anti-avoidance provisions where this strategy is employed. The ATO notes: “We would only be concerned where accessing the pension or undertaking the salary sacrifice may be artificial or contrived.”
This information is of a general nature only and doesn’t constitute personal investment advice.