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Transition to Retirement (TTR) – what do the changes mean for you?

10 July 2017

Money & Life team

Money & Life contributors draw on their diverse range of experience to present you with insights and guidance that will help you manage your financial wellbeing, achieve your lifestyle goals and plan for your financial future.

Transition to retirement pension arrangements have been a popular way for people to work part-time and boost their super with less impact on their income thanks to tax concessions. From 1 July 2017 the tax rules are changing. So how might the new tax rates affect you if you already have a TTR or you’re planning to put one in place?

A quick guide to TTR and the changes

Up until now, TTR has been an attractive way to increase your super contributions and maintain your level of income as you approach retirement. By reducing the marginal tax paid on some of your income by salary sacrificing super contributions and then supplementing your income from your TTR pension, you have a win win. With a lower tax burden, you can boost your super and potentially reduce your working hours without having to take a cut in your income.

But the added incentive of having your TTR pension as a growing super balance with tax free investment earnings will be coming to an end on 1 July 2017. From this date forward, earnings from super investments in a TTR pension will be subject to a 15% tax rate, just as your super in your accumulation account is. The new tax rate will apply to new and existing TTR accounts. The income you draw from your TTR will still be taxed in the same way so you’ll continue to pay your marginal rate less a 15% offset on this income.

What does this mean for current TTR pension holders?

“The changes to superannuation that commence on 1 July 2017 are significant and wide-ranging,” says Tim Mackay, CFP® and Principal at Quantum Financial. “Those who currently have a TTR pension should review their position and the effectiveness of this strategy for their circumstances.”

According to Tim, the new tax rate isn’t the only change TTR holders need to consider. “If you do decide to continue your TTR beyond 1 July 2017, the cap amount up to which you can salary sacrifice has been reduced to $25,000 for everyone. So at the very least you should review how much you are salary sacrificing above your SG (Superannuation Guarantee) contributions to ensure you don’t breach the new, lower cap. And if you earn over $250,000 per year the tax rate on your SG and salary sacrifice amount doubles from 15% to 30%. All these policy changes can have an unforeseen impact on your super savings, income and tax burden so it’s important to get expert advice and review your overall financial plan and position.”

What are the alternatives?

So if TTR is no longer the right strategy for you, what are the alternatives? If you’re stopping work altogether, an account based pension could offer a tax effective investment vehicle for your retirement savings. “The usual conditions to start an account based pension are to be at least aged 60 and retired, or to be 65 or over,” says Tim. “Investment earnings from an account based pension are still exempt from tax, but the 1 July 2017 changes will still have an impact on this investment approach. The new financial year will see the introduction of a new $1.6 million cap on the amount you can transfer to a retirement phase pension account, including account based pensions.”

With so many changes in super taking place, it’s more important than ever to have the right strategy and arrangements for a secure income in retirement. “As you approach retirement the big question is do I have enough?” says Tim. “Once the regular pay cheque stops you want to have confidence that you can sustain your lifestyle and afford the dream retirement you’ve planned. A financial planner helps you understand the financial implications of retirement and provides strategies so you can optimise those last years in full time employment and plan for retirement, comfortable in the knowledge that you will have enough.”

Whatever financial arrangements you’ve made for your retirement, a CERTIFIED FINANCIAL PLANNER® professional can offer valuable advice on preparing for a secure financial future and ensuring you have the income you need throughout your retirement.