(03) 9020 2905PORTFOLIO POINT: Let’s clear up a misconception – “transition to retirement” strategies are not about “retirement”. They’re about tax. And paying less of it.
I really enjoy writing for Eureka Report. You’re a fantastic, interactive audience. You let me know when I get things right (thankyou) and when I get things wrong (thankyou also).
And I got a good indication last week that I’ve been getting something wrong. I wasn’t told directly. But I can take a hint.
A Eureka Report-reading couple came in for a chat about their super fund. He was 57 and she was 53. They had a super fund with an above average sum of money in it and they were making further, considerable, contributions.
But one of the first questions I asked them was: “Is there any particular reason why the older of you isn’t on a transition to retirement pension?”
The answer, direct from the 57-year-old, was along the lines of: “I’m nowhere near wanting to retire. I have no intention of slowing down. We don’t need to draw money from my super fund for extra income.”
And there it was. Smack! Bruce, you haven’t been doing your job properly!
Let’s make this very clear: Despite the name, a “transition to retirement” (TTR) strategy is not about retiring, retirement, or even slowing down. TTR is about tax. And paying lots less of it.
Clearly, I haven’t been covering this angle of super funds enough recently. So, it’s time to fix the problem. Over the next few months, I’m going to spend some time on TTR and related strategies. (Not every week, but it will be a series.)
A brief history of TTR
The reason for the misconception about TTR is partly because of the name, which mentions the word retirement, but also has its origins in why it was created.
The Howard Government introduced the TTR rules in 2005. At the time, they were introduced as a worker retention strategy. They were designed to allow older Australians to access part of their super so they could downshift in the workforce from, say, five days to four or three, but continue to earn the same salary. (For the good of the nation!)
This is a legitimate reason for using TTR rules. But reducing work hours is, literally, the tip of the iceberg on TTR. It’s the 10% you can see that sits above the waterline.
The remaining 90% of benefits lie beneath the waterline.
The ghost of Kerry Packer
“Now of course I am minimising my tax and if anybody in this country doesn’t minimise their tax they want their heads read because as a government I can tell you you’re not spending it that well that we should be donating extra
That famous line was delivered by Kerry Francis Bullmore Packer to the Print Media Inquiry in 1991. It was the day Kerry Packer became Australia’s “patron saint of tax minimisation”. (If you’re looking for the two necessary miracles, I’d nominate World Series Cricket and Alan Bond, to whom he sold two TV stations for $1.05 billion and bought them back a bundle of TV stations from Bondy for around $300 million a few years later.)
A big portion of TTR as a strategy is about reducing tax. And this is done in four main ways.
- A super fund, when turned into a pension, pays no income tax
- A super fund in pension phase pays no capital gains tax
- Income drawn by a member from a super pension is taxed at lower rates (and for the over 60s, not at all).
- If it is combined with salary sacrificing, you will reduce your personal income taxes.
Those four prongs can mean that a person over the age of 55 – but particularly those over age 60 – can be saving tens of thousands of dollars for themselves and their super fund EVERY year through starting a super pension.
A few examples …
The average super fund has around $1 million and has two members. Let’s look at one member, who has half the super fund.
If $500,000 is generating an average income of 6% – currently higher from cash, but lower from shares – then it is earning $30,000 a year. This income is taxable in the fund, at 15%, meaning $4500 in tax would be due on that income.
Further, if the fund made some capital gains over the course of the 12 months, then it is liable to pay tax on those gains at 10% or 15% (the lower figure applies if the asset was held for longer than a year). Let’s assume the fund owned a parcel of shares that were taken over and elsewhere took some profits. A profit of $40,000 was made. Assuming the shares were held for longer than a year, CGT of $4000 would be payable.
A fund in pension phase would pay neither the income nor capital gains tax. So the potential savings in this example of $8500 is each and every year.
Now, when an accumulation fund is turned into a pension fund, an income stream needs to start. There are minimums that are required to be taken (which I’ll return to in another column). The rules are different for those aged 55-59 and those aged 60 and over.
If you are aged 60 and over, the income is tax free. For those aged 55 to 59, the income comes with a 15% tax rebate on the taxable portion. This means the maximum tax that will be paid on income prior to age 60 is 31.5% (including the Medicare Levy).
That is, an income stream of $50,000 taken from this pension would be taxed at a maximum of 31.5%, but only if you were earning in excess of $180,000. For all but very low income earners, the tax saving from this income stream (compared to earning non-super money) is around $7500 a year (15% of $50,000).
But I don’t need the income!
Okay, if you’ve now got an income stream that you don’t want or need, then there are two main ways to benefit. I’ll only touch on these briefly, because they will be the subject of future columns (in this semi-series).
If the super pension is adding to your other income stream/s, then you will generally have the choice to reduce those other income streams, by salary sacrifice (thereby getting more into super and further decreasing your tax burden) or, if self-employed, by making concessional contributions.
And this means taking advantage of the $50,000 concessional contributions limits that are only available for a little more than 18 months. This can further reduce your tax position. If you are on the highest wage bracket, then the tax saving could be as much as 31.5%, which is the difference between the top tax rate of 46.5% and the super contribution rate of 15%. Therefore, on a $50,000 concessional contribution, the saving could be as much as $15,750.
So, it’s not about retiring then?
No. In fact, those who aren’t even thinking about slowing down stand to benefit more from TTR strategies than those who are going to use it to reduce their working hours.
Few will be able to take advantage of every single dollar of tax savings that I’ve briefly outlined above, as everyone’s situation is different, which adds up to about $31,750 split between you personally and your super fund.
But the point is this: These sorts of tax benefits are what a transition to retirement strategies are about. It’s highly likely that if you aged 55 to 65 that you are “donating extra” to the government if you are not on a TTR pension.
That’s an overview of TTR. In the coming weeks and months, we’ll drill down into these topics, and others, more deeply.
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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are advised to consult your financial adviser.
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.