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already paid into superannuation guarantee contribution (SGC) by employers, a prescribed percentage of super is then withdrawn as a pension.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.