29th Jun 2016
How Election 2016 might change your retirement
How Election 2016 might change your retirement

Many YourLifeChoices members have asked if a transition to retirement strategy will still be an effective means of managing retirement savings if the proposed changes announced in Budget 2016/17 go ahead. We decided to ask an expert and Noel Whittaker has provided a clear and concise breakdown of what you need to know.

Just before the Federal Budget 2016/17 was handed down, I flagged the possibility of a change in the rules regarding transition to retirement strategies (TTRs). I was right, their effectiveness will have been reduced, from 1 July 2017, by taxing the superannuation fund as if it was in accumulation mode and by reducing the amount that can be salary sacrificed to $25,000 a year.

The essence of a TTR is that you reduce your gross income by salary sacrificing a big chunk into superannuation and then making up the shortfall in your net pay by starting a pension under a transition to retirement strategy. As the following example shows this strategy could once be used to give high-income earners a huge boost to their superannuation.

Think about Jim, aged 60, who earns $260,000 year, which puts him in the 49 per cent tax bracket. Under the existing rules he is allowed to salary sacrifice $35,000 to superannuation and pays just 15 per cent in contributions tax. This boosts his superannuation fund by $29,750 – the same money taken as income would be worth just $17,850. The cream on the cake for Jim is that by using this strategy, his fund becomes a tax-free pension fund and the pension he draws from it is tax-free.

Under the proposed rules, while Jim can still use this strategy, the maximum concessional contribution will be $25,000, his fund will not become tax-free when he starts a pension and the tax on his contributions will be 30 per cent, not 15 per cent.

This is not to say that salary sacrifice is still not worthwhile. A person earning between $180,000 and $250,000 a year will still be allowed $25,000 into superannuation as a tax deduction and pay just 15 per cent tax. Money taken in hand would be taxed at 49 per cent.

There is some good news – the work test is going to be abolished for those aged between 65 and 75. Currently, those in this age bracket have to prove they have worked 40 hours in 30 consecutive days to be eligible to contribute to superannuation. It was a stupid rule, and easy for anyone street smart to get around.

From 1 July 2017, individuals will be able to make deductible contributions before they have turned 75. This could be particularly useful in reducing capital gains tax. For example:

Suppose a retired couple sells shares or property that triggers a capital gain. Providing they are under 75 they can both make a deductible contribution of $25,000, which would reduce their taxable income and could reduce, or even eliminate, the taxable capital gain.

These proposed changes to superannuation open up a whole new world for anybody planning for retirement. The need to make provision for your own retirement still remains as great as ever, due to rising life expectancies and the inability of governments to live within their means. Interest rates fell again last month and will almost certainly keep on going down. The big change now is we need to rethink how we build our wealth.

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.



    To make a comment, please register or login
    30th Jun 2016
    everybody seems to worry about the people being paid what is to me huge salaries,What about the ones earning way under $100,000 per year
    30th Jun 2016
    I wonder how many subscribers to YLC are fortunate enough to earn $200,000 or more P.A.
    An article where the subject person earns between $60,000 and $120,000 would provide a more relevant example I think.
    30th Jun 2016
    I'm not worried about people like Jim. They can afford to pay their own way. How we ever let our parliamentarians pass such unfair legislation is beyond me. Inequality is Australia has never been so bad. Wake up, Australians! You're being ripped off by this mob of incompetents. My ancestors didn't fight wars for this sort of thing to exist.
    30th Jun 2016
    >"....his fund will not become tax-free when he starts a pension and the tax on his contributions will be 30 per cent, not 15 per cent...."
    > "...still be allowed $25,000 into superannuation as a tax deduction and pay just 15 per cent tax..."

    So, will contributions to super be taxed at 15 or 30%?
    30th Jun 2016
    His contributions will be taxed at 30%. His gain will be only 19% instead of the current 34%. Sad isn't it. But only for people with an income over $180K. It's so unfair. Poor things.
    30th Jun 2016
    Let's wait until any proposed changes pass both of the newly elected houses , before we know what will actually happen......something about counting your chickens......
    Another thing I wanted to raise is. Matching currency of assets and liabilities:
    If your needs are in AUD , then investing in assets in another currency is always a risk, as the other currency assets will fluctuate with exchange rates and in a different economic cycle to your spending. As I am invested in AUD, Brexit is not a worry, except to the extent that investments in Aussie companies trading in UK and Europe may be affected in the long term. Most of the pre Brexit gains ( bets on the outcome) have been lost and we are back to pre Brexit prices.
    30th Jun 2016
    Under Libs the rich will get richer the poor get poorer. My local public hospital is inaccessbile to disabled people. Its also falling apart inside roof panels dropping off, fungus grows on the outside southern walls they get NO funding. They cut down on pain medication allowing patients to suffer. Meanwhile the local MP Lib got $80 million for the private hospital new ER rooms new MRI CT etc. etc Cafe etc. Is this what we want for Australia ?

    30th Jun 2016
    Yes, transition TO retirement is very important, but once you are there you are subjected to the transition IN retirement with its ever-changing rules, regulations, thresholds, etc and not a grandfathering clause to be seen. These bastards in government right now are always moving the goal posts while the game is in play and the retirees' posts are always on the high ground. Once you are retired it isn't all beer and skittles, but a time to be forever vigilant to the changing rules of a greedy government trying to take what you have worked for and reducing your rightful entitlements. VOTE THE CURRENT GOVERNMENT OUT OF OFFICE!
    30th Jun 2016
    great to see fast eddie stand in for labor mick
    30th Jun 2016
    I voted a week ago and not one vote for Labor OR LNP or Greens.
    30th Jun 2016
    I voted a week ago and not one vote for Labor OR LNP or Greens.
    30th Jun 2016
    "...his fund will not become tax-free when he starts a pension...."

    Does this mean they are going to start taxing Superannuation pensions for people over 60?
    30th Jun 2016
    To Jomojo Fast eadie etc under Lab they don't want you to be self sufficient or care for your parents etc but be totally reliant on them.Seems like you only want handouts too!!!! Macca

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