Do you have a transition-to-retirement strategy set up by your financial planner that you have not heard about for some time? Then get on the phone and organise a meeting. Under the lower superannuation contribution cap of $25,000 from July 1, the cost of the strategy may outweigh the benefits.
As the name implies, the transition-to-retirement strategy was originally introduced to allow those aged over 55, who wanted to work less, to top up their living expenses from their super.
It is still a good strategy for that purpose. But, in recent years, the strategy has been used by planners as a tax strategy for older clients. The way it works is that those over 55 start a pension alongside their super fund. They draw down income from the pension. That allows them to salary sacrifice pay into their super up to the contribution limit while maintaining their overall after-tax income.
The strategy allows them to take full advantage of the cap. The main, but not only, tax benefit of the strategy is in replacing income that would have been taxed at the person's marginal income tax rate with the 15 per cent tax on contributions to super.
It was a good strategy when the maximum salary sacrifice cap was $100,000 in 2007-08 for over-50s.
It was still all right for some people when the cap was lowered to $50,000 in the 2009-10 financial year.
But now that the cap has been halved to $25,000 for over 50s it's hard to see how it can work for most people, though it looks better for over-60s because they can draw down income from their pension account tax free.
Many people use a financial planner to implement a transition-to-retirement strategy, though the rules are not very difficult and people could and do implement it themselves. But fees to a planner to set up the strategy are between $2500 and $4000 and then there are the ongoing advice fees.
Running two funds - a super fund and a pension fund - is more expensive than paying fees for just a super fund. Financial institutions employing the planners show the benefits of the strategy in the most favourable light without accounting for the costs.
Even on these most favourable numbers with a cap of $25,000 (which includes the 9 per cent compulsory super) the strategy is marginal after the likely cost of getting advice.