Many Australians are now making the most of the government’s simple super regime and establishing a transition to retirement strategy (TTR). This allows you to continue working, either part or full-time, while sacrificing some or all of your employment income into super. In order to make up for the pay going into super, you can start drawing a pension income from your existing super savings.
Sounds like a great idea, but do the numbers actually stack up? We take a closer look.
Case study 1: Anna
According to Bryan Ashenden, head of technical consulting at Asgard Wealth Solutions, implementing a TTR strategy may not pay off in the first year, but the long-term financial benefits are considerable.
Anna, aged 55, earns $76,000 a year, and currently has an existing super nest egg of $350,000. She wants to continue working full-time, but decides to sacrifice $38,000 of her income into super over the next ten years. She will also convert her $350,000 to a pension. We will assume that her salary increases at a rate of 4% per annum, and that her super investments return 7% before tax.
Anna’s goal is to retain her existing level of after tax salary, while also increasing her retirement savings.
Without TTR in place, Anna earns $58,060 after tax each year. After implementing TTR, Anna will retain a $38,000 salary, and draw a pension of $29,510. Ashenden says the tax effectiveness of the strategy will reduce her personal tax liability in the first year to $9,448 and Anna will end up with $58,062 cash in hand – just slightly more than if she had done nothing.
After one year, her retirement savings will have grown from $377,046 to $385,772 – an increase of $8,726. Ashenden says that despite withdrawing a pension payment of $29,510 from the TTR pension account, the balance has only fallen by $5,010 from $350,000 due to the investments in the pension growing in a tax free environment.
At the ten year mark, the TTR strategy really shows its value. Anna’s total retirement savings have increased by over $150,000 to $870,649, compared to $720,248 if TTR had not been put in place.
Ashenden believes the TTR strategy is likely to become even more popular now that the government allows tax-free withdrawals from a super fund after the age of 60. He adds that the recent market volatility, which has prompted many people to consider delaying the date of full retirement, means the use of TTR can help enormously in building extra wealth for the retirement years.
Case study 2: William
David Haintz, managing director and principal consultant of Haintz Financial Services, says TTR also has an important role to play for those individuals who are much nearer to retirement, with a financial benefit already apparent within 12 months.
William, age 60, hopes to retire in five years time and wishes to give his super savings an additional boost. He earns $130,000 per annum; providing a net income of $83,771. William also has an existing pension pot of $350,000.
As William is aged 60, he can access a tax-free pension payment of up to $21,000 per annum. At the same time, William begins salary sacrificing $35,898 into super which, along with his employer’s SGC payment, will bring his total super contribution to $46,632 per annum.
William’s net income remains the same as if he had not implemented TTR, but his super savings are now $13,040 greater by the end of the first year. And over the next five years, William will have almost $70,000 more in retirement savings. Haintz adds that if William is able to reduce the amount of income he needs to live on, or direct any future pay increases to salary sacrifice, he can further boost his super pot.
Read the fine print
So are there any downsides to TTR? Haintz says it is important to remember that salary sacrificing can result in a reduction to other employment benefits – such as leave loading, holiday pay, and superannuation guarantee contributions, as these may be calculated on your base salary.
There is also an annual limit to the amount of concessional, or before tax, contributions you can make into super, depending on your age. Currently individuals can only allocate between $50,000 and $100,000 to super. So making a last ditch attempt to boost your super savings with hefty contributions is not going to work.
Both Haintz and Ashenden also warn that individuals with unrestricted, non-preserved benefits, which can be paid out to you at any time irrespective of your age or employment situation, may want to take some extra care as these benefits will become preserved once transferred into TTR, and therefore less accessible.
Setting up a TTR strategy is not inherently difficult, nor are there any huge set-up costs. But it’s still worthwhile to get some advice. A financial adviser can provide guidance on how much you should salary sacrifice, and calculate those complex tax benefits for you.