Noel Whittaker
Noel Whittaker

Transition to Retirement Pensions

THE recent changes to superannuation have led to a flood of emails asking whether a transition to retirement pension (TTR) is still a good strategy.

The answer is a resounding yes. What makes TTRs particularly attractive is the ability to continue contributing to super while drawing a tax free income from your fund - this  enables you to take advantage of the difference between the 15% tax on contributions and your marginal tax rate.

Think about a person who earns $100,000 a year.  Their employer should be paying compulsory super of 9% for them, being $9,000, which is well short of the $25,000 they are able to contribute as a concessional contribution.

Suppose they reduced their income to $84,000 by salary sacrificing an additional $16,000 a year to super.  Their take home pay would reduce by $10,080 but the net contribution to super would be $13,600 after deduction of the 15% entry tax.

They are immediately $3,520 better off - it's a no brainer.

Let's look at a case study prepared by Colonial First State.

Jack aged 55 earns $50,000 a year and has $300,000 in super. He starts a TTR by salary sacrificing an extra $20,500 a year.  The use of a TTR strategy would give him an extra $39,900 at age 65 if his superannuation returns 7% per annum.

The great advantage of a TTR strategy is it should be available to almost everybody over 55, and gets even better at age 60, once withdrawals become tax free.  Certainly its effectiveness may diminish over time as wages rise due to inflation, and the additional contribution that can be made by an employee falls as the employer compulsory contribution rises to 12%.  In the meantime it's one of the few simple tax saving methods available.