TTR: The secret to not having to work longer

SUMMARY: You don’t have to work longer. Just be smarter with your super. Have a transition-to-retirement pension in your sights.

Yet another government manifesto says the nation’s workers are going to have to get used to the idea of working longer.

The Intergenerational Report (IGR) last week punted on how much longer we’re going to live and how much more that’s going to cost us (the country’s taxpayers) to support those in retirement with government pensions and health care.

It’s going to get tougher and tougher on the public purse. We know that.

And we also know that some people will never help themselves and there are others who can’t. The Superannuation Guarantee (SG) – no matter what the Institute of Public Affairs says – is needed to help with providing a base level of retirement income for the masses.

But for those who are determined to live a standard well above that, and are prepared to invest the time and money into making sure that doesn’t happen, there are rules to help.

Those rules include transition-to-retirement (TTR) pensions.

TTR pensions are designed to allow you to draw on your super while you are still working. That is, you can take a super pension – which will be tax advantaged, if not tax-free – while continuing to earn an income.

Further, they allow you to continue to contribute to your super (through salary sacrifice or extra concessional contributions), as you draw a pension. For the vast majority, this roundabout of cash will either increase cashflow, increase your super balance, or potentially both.

Particularly if you’re over 60. For those over 60 and still working, it is highly likely that you are simply donating money to the Tax Office, if you’re not on a TTR pension.

Tax-free pensions

A TTR pension can be turned on from age 55, depending on your birthdate (see Table 1).

Table 1: Hitting your preservation age

The benefits for those between 55 and 59 are usually somewhat limited in an immediate tax-savings sense, though they can benefit from the “other advantages” listed below.

The maximum pension you can on with transition-to-retirement is 10% of your pension fund – to turn on a pension, you need to roll over some, or all, of your super accumulation fund. (You don’t need to roll your entire super fund into pension.)

For those under 60, the pension income must have tax paid on it of your marginal tax rate, less a rebate of 15%. For those over age 60, the income is tax free.

Let’s give the example of someone who’s over 60 and who has $200,000 in super. They can draw a pension of up to $20,000.

Because they’re over 60, that pension income is tax-free. The $20,000 that they earn from the pension is $20,000 after tax.

If they were trying to earn that in the workforce, they would have to earn as much as $39,216 before tax (if they were on the highest marginal tax rate earning above $180,000 a year). For someone earning $120,000 and on a marginal tax rate of 39% (including the Medicare Levy), they would need to earn $32,787 to get $20,000 after tax.

Enter Salary Sacrifice

So, given the $20,000 pension means needing to earn $32,787 less as income, there is plenty of scope for our 60-year-old to add back into super via salary sacrifice.

Assuming their net salary was at least enough to meet their income requirements, then they can now salary sacrifice some of the $32,787 to super. If the entire amount was salary sacrificed to super, then $27,869 would make it into super after the 15% contributions tax was paid.

So, for no loss of income, $20,000 has been drawn from super and $27,869 has been put back in.

However, the calculations are not normally quite as simple as that. Inevitably, some adjustments will need to be made for your personal circumstances.

The $32,787 is a concessional contribution. If you are earning $120,000 as an employee, then your employer is putting in 9.5% of your income, or $11,400 a year.

If you add the $32,787 with the $11,400, then you’ve got $44,187. That is well over the $35,000 concessional contributions cap for those aged over 50. At that rate, you will be hit with excess tax on the contribution. And it probably won’t make sense to do that, so you will want to contribute less.

In the instance above, the employee would want to consider limiting his extra concessional contributions to $23,600, instead of $32,787.

This might also mean making an adjustment to the amount of pension taken.

Alternatively, if the employee had savings capacity, she could decide to put any excess savings or income back into super as a non-concessional contribution (which are not taxed on the way into the fund).

There will generally be a sweet spot for each member in regards to maximising the super contributions and reducing tax. These can be complex calculations that can require the help of financial advisers and/or fund accountants.

Other advantages to this strategy

The immediate tax savings above are often the main benefit. Most of the time. But there are other benefits of the strategies outlined above that shouldn’t be overlooked, but can be harder to put a dollar figure on.

The first is that when you move assets from accumulation to pension, the assets backing that pension become tax-free. Any income or capital gains that are made by the assets in the pension fund are accrued without tax.

If you have $100,000 of shares earning a fully franked dividend of 5%, then your $5000 dividend will come with an imputation credit of about $2140. A pension fund will get that whole $2140 back, rather than half of that figure for an accumulation fund.

The reduced taxation on income and gains is, obviously, a bigger benefit to those with larger pension funds. But larger pension funds also means larger pension income streams need to be paid, which needs to be taken into account.

If only you could contribute those tax-free earnings back into super … well, if you’re still able to contribute to super, you can.

A second advantage is that if you are in a position to be making some non-concessional contributions back into your fund, you will be changing the tax position of the fund, which can be of particular benefit to non-dependant beneficiaries.

That is, the more NCCs you make, the less tax that would be paid by, say, your adult children when and if they are to receive your superannuation as a death benefit.

Super benefits left to dependants (largely spouses, children under 18 and those in interdependency relationships) are tax-free. However, non-dependants will pay a portion of tax on the “taxable” element of the fund.

Therefore, the higher the proportion of NCCs in your super fund, the less tax that will be paid by non-dependants.

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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 strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is managing director of Bruce Brammall Financial. E: bruce@brucebrammallfinancial.com.au . Bruce’s new book, Mortgages Made Easy, is available now.