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.