TTR strategy – why the rules need tightening

TTR strategy should be the focus of the upcoming federal budget.

In the first of a new series of articles focusing on different aspects of retirement income, we highlight the need-to-know aspects of superannuation, taxation, the Age Pension and home ownership that may be subject to change in the May 2016–17 Federal Budget.

The transition to retirement (TTR) strategy was introduced by the Howard government in July 2005. The stated intention was to allow ‘near’ retirees to stage their progress into retirement (upon reaching preservation age) by being allowed to access their superannuation savings in a pension that would supplement the lower salary caused by a reduction in their working hours.

Funny that. Sadly, the TTR has turned into a marvellous ‘round robin’ sleight of hand much loved by accountants who use it on behalf of wealthy pre-retiree clients.

Taking into account the amount already paid into superannuation guarantee contribution (SGC) by employers, a prescribed percentage of super is then withdrawn as a pension. A similar amount is then deposited as salary sacrifice back into the same super fund. Crazy, hey? But just think of the tax these pre-retirees have saved.

Here’s a hypothetical case study. Let’s say Sue and Brian are aged 61, both working full time, a few years off their preferred retirement age, and keen to maximise their eventual retirement nest egg. Along with another 1 million Australians, they have a self managed super fund (SMSF). For ease of calculation, let’s assume they earn a median income each of $67,000 per annum and that their super balances are $250,000 each. At age 61 each year they are allowed to put $ 35,000 (minus the $6365 each already paid on their behalf by their employers) each into super as a concessional contribution. Under TTR rules, both Sue and Brian can also draw down a minimum of four per cent, and a maximum of 10 per cent each per annum in a pension income stream. So from January, or thereabouts, they withdraw $25,000 each from their super fund as a TTR income stream, and before 29 June, they deposit $29,635 each as a salary sacrifice contribution on top of the $6365 (9.25 per cent SGC) already paid during the year by their respective employers. They have therefore shifted $50,000 out to help shift $70,000 in and saved themselves approximately $3000 in tax on the way through.

So what was that all about, you wonder?

And this is exactly why the TTR needs to be tightened. As a policy to encourage people to gradually reduce their working hours, from full time to part time before eventual retirement, it makes a lot of sense both financially and emotionally. But no one ever seems to check if the person receiving a TTR pension is actually working fewer hours. So it has become a neat way of avoiding tax and possibly eroding eventual retirement savings, which is probably not the original intention of the legislation. So if this messy area of retirement income is reviewed and revised in the 2016/17 Federal Budget, it will be a step toward a fairer system for all.

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    COMMENTS

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    Hawkeye
    25th Feb 2016
    10:42am
    Just like most Howard initiatives, TTR is a furphy.

    I was asked to consider TTR before I retired.
    It would have consisted of me rushing through my full 5 day workload in only 3 days and for only 3 days pay. And also I would be expected to find time to train up someone to replace me.
    NO THANKS, I'M NOT QUITE THAT STUPID!!!!!
    So knocked it back and got a full 5 days a week pay until I retired.

    Wasn't aware of the rort you describe above, but then it sounds like it has nothing to do with actually transitioning oneself towards retirement. Just another lurk for the rich.

    Trouble is, any changes made will inevitably come with loopholes that will be found and exploited by the rich with their access to cunning accountants and lawyers.

    It's well and truly time that each piece of legislation was accompanied by a "statement of intent" (in plain language) which should have priority in any interpretation of the legislation.
    roy
    25th Feb 2016
    11:06am
    Vote independent.
    Anonymous
    25th Feb 2016
    5:37pm
    labor mick, lifeChoises cockatoo
    roy
    25th Feb 2016
    9:32pm
    Make being obese illegal.
    maelcolium
    25th Feb 2016
    11:04am
    The reasons for TTR are actually quite progressive, but like all things financial, people will always act in their own best interests ....... and why not?
    Looking at it in another way, we all are subject to the rules enacted by politicians on superannuation. They encourage us to arrange our affairs so that we are not a burden when we retired, but when we act as they intended we get wacked around the ears by making the best of a situation. We can't win really.
    These stories remind me of the generalities that exist around so called dole bludgers. A small percentage rort the system because they act in their own self interest - but that's human nature. Similarly a small percentage take advantage of TTR - but is this a small percentage or the norm? Given that the average retirement nest egg is circa $100K for males I doubt it is a general observation, but more an envious assertion made by the social engineering experts who make these pronouncements without the support of any evidence.
    Retired Knowall
    26th Feb 2016
    11:28am
    You are so right, "Animal Farm" comments by the entitled welfare brigade.
    Gazza51
    25th Feb 2016
    11:43am
    I think I'm missing the point here. The writer of the article is saying that in the example given; they "shifted $50,000 out to help shift $70,000 in and saved themselves approximately $3000 in tax on the way through". Doesn't this mean that they've effectively added an extra $20,000 in to boost their super and have less reliance on the Aged pension. Is that a bad thing?
    Kaye Fallick
    25th Feb 2016
    11:51am
    Hi Gazza, lower reliance on the pension is not a bad thing at all. But my question is whether it is fair that those who earn more have more opportunity to save more for retirement whilst this avenue of tax minimisation is not open to those who earn less - it is about the social equity, not whether we should be on a pension or not?
    LiveItUp
    25th Feb 2016
    12:11pm
    Yes it is great strategy to boost your retirement funds. It works better with bigger super balances as the super draw down is tax free after 60 and super fund pays no tax. Before the super contribution was capped at $35000 people used to put all their salary I and take out the 4% minimum from their super fund. So they would effectively only pay 15% on their salary instead of their marginal rate.
    KSS
    25th Feb 2016
    12:59pm
    Kaye this is open to everyone regardless of their salary level and is beneficial as long as they are actually paying tax above 15%. The first tax threshold is 19% so even they would 'win' by only paying 15% on salary sacrifice.

    In real life Kaye, people earn a range of salary levels and thus it was and so shall it be. Bemoaning the fact is futile particularly on a social equity level. In addition, there are caps on the amount that can be sacrificed depending on age (and these caps have been reduced in recent years) and which, as this article points out, include the employer contribution. After that people make AFTER tax contributions. That means they are taxed at their marginal rate first before they pay the money into super. So that becomes just another form of saving - an alternative to putting it in say a bank - the main difference that once you put it into super you cannot withdraw it until you reach retirement.

    I am getting really sick of this circular argument that only 'rich' people have access to this. It is NOT an elitist tax minimisation strategy at all, but one that even those on modest wages can and do access.
    Rae
    25th Feb 2016
    4:50pm
    Is it available to workers in defined benefit schemes who contribute after tax dollars as contributions towards units. I have been told that it isn't available to them. They do not get the 9.5% superannuation guarantee either.
    Sundays
    25th Feb 2016
    7:34pm
    No Rae it isn't but while you don't get the 9.5% super guarantee, you do get the employer component when you retire. With some employers, particularly state govt this is higher than 9.5%. A cpi linked pension payable for life is gold. You worked and contributed for it, so lucky you.
    old-age worker
    25th Feb 2016
    12:40pm
    I am surprised. I always thought TTR was a variable between continuing full-time work, and saving tax, and whatever part time work you could do, dependant on how much you can realistically withdraw from your super balance.
    In my case, my company "doesn't offer" part time employment, so my option would be to continue full time, and use it to save tax.
    I am 64, and full time wage is about 68000. I am not what you would call "rich" and a high-income earner, so why shouldn't I take the opportunity?
    Mind you, the tax savings are not as great as some may tell you, and you ARE taking money out of your super pool.
    Sundays
    25th Feb 2016
    2:03pm
    The ASIC website is quite clear that the aims of TTR pension are either to allow those pre retirees to keep working full time and boost super and save tax, or reduce working hours and soften the drop in income. Therefore, this article has it wrong. There is no rorting by the rich, no loopholes. The stated aims of the policy are for everyone who takes the trouble to avail themselves. I hope future articles are more based on facts
    Anonymous
    25th Feb 2016
    5:34pm
    hey sunday, you are talking about lifeChoises, facts don't mean anything to them, they only want to push their leftist ideals down your throat, anything to have a go at the so-called rich or at to-days government, I wonder if they are an offshoot of the abc?
    roy
    25th Feb 2016
    5:42pm
    We all have to vote independent, the only way to go.
    Kaye Fallick
    25th Feb 2016
    6:01pm
    Hi Sundays - thanks for your comment - we are aware of the stated reasons for a TTR strategy - i wrote this as an opinion piece about the way this legislation has been used, rather than it's intention - in fact, I have noted in the final paragraph, that as a policy "it makes a lot of sense financially and emotionally" - my concern is that it is being abused because there is no check if the worker who has started transitioning is actually working fewer hours or if they are merely shifting money. I do believe I did not mis-state any facts.
    Kaye Fallick
    25th Feb 2016
    6:05pm
    Hi Heemskerk99
    I am sorry you believe we push any ideals anywhere. If we were that biased we would not encourage comments from everyone, positive and negative. We believe we offer an open forum, based on opinion pieces, which encourage our 140,000 members to respond. We only ever remove comments which denigrate other members or use bad language. No, we have nothing to do with the public broadcaster - we are an independent publishing company with no affiliation to any other organisation. rgds, Kaye
    Sundays
    25th Feb 2016
    7:00pm
    My point Kaye is that it was never a requirement of this policy to work shorter hours. This is where you have the facts wrong. It is a deliberate two pronged policy to keep seniors in the workforce longer. One of the aims was for people cutting back hours to be able to access super but for those who stayed working full time the aim was to increase super and save tax. Shifting money around as you call it!
    Sundays
    25th Feb 2016
    7:22pm
    I might also suggest an article on the senior Australian tax offsert SATO) whereby eligible seniors can use this offset to reduce any or all tax in retirement. However, it is only available to low and middle income earners. The wealthy miss out!
    Sundays
    25th Feb 2016
    7:40pm
    Well Heemskerk99 I have a social conscience, perhaps leftist leanings. but I don't like incorrect facts getting in the way if a good story. I found the same with Get Up. Emotive statements without the corresponding research to back them up.
    roy
    25th Feb 2016
    10:08pm
    Why is there so much jealousy of people who have worked hard, made a go of it, read a lot re taxation etc instead of playing the pokies, watching garbage on the t/v like big brother etc, carefully invested their cash, read stories to their children at night, the list goes on. But thickos who can't be bothered to do the right things then moan and have the cheek to say "life is not fair". do me a favour please.
    Oh I forgot to mention the umpteen tattoos they can afford to have, yuk.
    Not Senile Yet!
    25th Feb 2016
    11:51pm
    You all missed Faye's point in her article!!!
    She was drawing attention to the fact that people are using the TTR as a way of dodging paying tax.......short and sweet!!!!
    No wonder the Government CANNOT Balance OUR Tax Budget......they keep producing ideas like this without tightening the Loopholes.....and thereby allowing people to dodge paying their fair share!!!!!
    As to the Comments on here about it being Okay....you have to be kidding????
    The average worker simply CANNOT Salary Sacrifice their Super nor can the Millions who only work Part-time!!!!!
    You all need to get real about stating that it is fair!!! Especially when only the privileged Top Half of Society have access to or can afford to put extra into Super AND get a TAX DEDUCTION for doing so!!!!
    Come on!!! The average worker would put an extra $20 a week into Super if the Tax Dept lowered their tax by the same amount....now wouldn't they????
    Plus every Accountant worth his salt would be onto it in a Flash......then you would hear about it when the tax income went Ally OOpp....accordingly!!!!
    No......Faye is Right .....big loop hole....that needs tightening!!!!
    Tax Avoidance is Tax Avoidance.......and that is as plain as day!!!
    old-age worker
    26th Feb 2016
    9:00am
    To respond to Not Senile Yet!'s comments,
    As Sundays said, the "loophole" is part of the plan. It was designed that way, to encourage mature (and experienced...) people to stay in the workforce, build up some more superannuation, so they don't be a burden on the pension system. It actually uses Superannuation (which is invested profitably) to prop up the pension system (which cant be invested profitably).
    To close that loophole would be to chop the intent of the plan in half.
    And another point, EVERY wage earner can salary sacrifice into Super. There IS a limit as to how much you can put into your super each year, but anything over that limit is still allowable, but taxed at your marginal rate, so there's no benefit. You pay out of pre-tax earnings, so the amount you put into super is only taxed at 15% instead of your marginal rate. Once you reach your preservation age, you can take a pension FROM your super balance to make up the amount you sacrificed. Net result is your take home pay from wages and super is the same as it always was, except now you are only paying 15% tax on the money you put into super instead of at your marginal rate.
    Any wage earner can afford it, once they get to their preservation age, with the exception of those below the tax-free threshold who still pay 15% tax on their super contributions. THAT is VERY unfair!
    In that, I disagree with Kaye: It's not a "loophole" that needs to be closed because it's being exploited. There is a limit to how much you can salary sacrifice per year ($35K springs to mind, but there is a formula), so the mega-wealthy are no better off than most wage earners at that age.
    Anonymous
    26th Feb 2016
    6:10pm
    thanks old age worker, you put it correctly, it is legal, it is not tax avoidance and most important it gives everybody a change to improve their super.