Transition to retirement strategies (TTRs) were introduced in 2006, in tandem with the Howard–Costello reform of the superannuation system. At that time, Australia was facing a growing skills shortage, with the oldest baby boomers then nudging 60 years of age. As more retired, so grew the difficulty of finding experienced replacements.
At the same time, many older workers wanted to cut down on their hours and were happy to accept a reduced wage for doing so, but they did not want to give up work completely. The problem was accessing super to cover this reduction in income. Even though withdrawals from super became tax free from age 60, employees could not access their super until preservation age (55 if born before 1 July 1960) unless they were prepared to sign a statement that they were permanently retired. And once they reached 60, they had to resign from a job to access their super.
TTRs solve this problem by enabling those who have reached their preservation age to have their cake and eat it too. Australians can now access their superannuation as an income stream while continuing to work, and take advantage of tax-saving strategies.
If you are aged between preservation age and 60, the income from a TTR is fully taxable less a 15 per cent rebate – if you are 60 or over, it is tax free.
The ultimate bonus for those approaching retirement is that superannuation funds become tax-free funds once an income stream has commenced. Obviously, a tax-free fund will receive higher after-tax returns than one that is paying 15 per cent tax.
What makes TTRs particularly attractive is the ability to continue contributing to super while drawing a tax-free income from the fund; it enables anyone adopting the strategy to take advantage of the difference between the 15 per cent tax on contributions and their marginal tax rate.
Proposed changes to superannuation announced in the May Federal Budget will, if legislated, make TTRs less effective from 1 July 2017. The amount that can be contributed as a concessional contribution for people over 50 will be reduced from $35,000 to $25,000 a year, and the tax on contributions will be increased to 30 per cent for people who earn $250,000 a year or more. Also, the fund will continue to pay income tax at 15 per cent even though the TTR has commenced.
Nevertheless, TTRs can still be useful for older workers, especially if you are 60 or over. Provided you earn less than $250,000 a year, it enables you to maximise the amount of gross income you can receive; it is effectively taxed at 15 per cent instead of your marginal rate.
Also, if your budget is tight, you can make up for your pay packet reduction due to increased salary sacrifice by taking a tax-free pension.
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Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions.