Transition to retirement pensions: not dead yet

For many, it was almost too good to be true. A tax lurk that allowed a roundabout of tax minimisation that was effectively a handout to those over 60.

Transition to retirement pensions.

For those over 60, you take an tax-free income stream from the super pension you set up, then make sure you salary sacrifice, or make concessional contributions, where your income is only taxed at 15 per cent instead of marginal tax rates.

Win. Win. WIN.

Yep, the same TTR (aka TRIS) super strategy that tripped up Foreign Affairs Minister Julie Bishop yesterday. (Superannuation itself is complex. I'm not surprised Ms Bishop doesn't know the detail of this complex system. Is it a “gotcha” moment? No, who expects the government's international affairs spokeswoman to be across this complex superannuation strategy? Not me.)

I'm here to let you know that TTRs – if the Turnbull government is returned and has a mandate to pass its superannuation changes through parliament – are not dead.

Under the Coalition's planned new rules for TTR, the strategy will become less effective, sure. For some, they will no longer be worthwhile, most likely. And, arguably, the people who COULD most benefit from it, but aren't currently, are those who will be hurt the most.

But is TTR dead if the Coalition is returned on July 2? No.

The Turnbull Government's new TTR proposals will mean (noting that we don't have the fine print) the pension fund itself will have to pay tax at the regular super fund concessional rate of 15 per cent (and presumably the notional rate of 10 per cent for capital gains).

Who is this attack aimed at?

This is the weird bit. If all the people who could really make the most effective use of this strategy properly did actually seek out the advice and implement it, then this “lurk” would probably have been shut down five years ago, based purely on the cost to the public purse.

But it was only really used by those who paid to get quality advice.

And here's the rub. The people who have had the most to gain from TTR/salary sacrifice are those with relatively small super/pension balances. On a percentage basis, this strategy was most effective for those with small super balances who could potentially pump in a lot to super in the final years to retirement.

(But it was also useful for those with reasonable-sized super/pension balances, who could use the strategy to make their pension funds tax free. The biggest of those will now be hit by this strategy and the fact that pension funds will be limited to a starting point of $1.6 million.)

Unfortunately, sadly, these are often not the ones who necessarily pay for the advice that will achieve the optimum outcome.

The people who tend to benefit from this most are those who have reasonable balances, are a couple, who could both use it to their advantage, and who can effectively implement the savings twice over.

If you have a balance of, say, $500,000, you take a four per cent TTR pension of $20,000, then absolutely make sure that you get the full $35,000 concessional contributions (valid until June 30 2017) into super, either via Superannuation Guarantee, or salary sacrifice, or via concessional contributions for those who are self employed.

Or potentially those with a $200,000 balance who took a 10 per cent pension, but also maximised the contributions they make to super.

(If the government is alleging that their super changes would only hit the top four per cent, then they were telling a fib. The changes to TTR are likely to negative impact potentially two-thirds of the population.)

Part of a couple? Do it twice and double the benefits.

Those who could make the most of this rule are those who are on middling, to below-average, salaries and superannuation balances, who really had an opportunity to draw a small/minimum pension and make the maximum concessional contributions.

How do you still make it worthwhile?

Based on what was released on Budget night, the government's aim is that it will start to tax pension funds for those who are receiving TTR pensions (which are denominated differently by the pension fund).

The government hasn't talked about taxing the pension income streams (though the $1.6 million pension fund limit will impact on some) so you may still benefit from strategies here.

The main way around this will be those who have the ability to change a TTR into an allocated pension (AP), which will become a more highly refined strategy on which to seek advice.

Who this will really hurt?

It will hurt a lot of 60-year-old-plus people with smaller TTR accounts who were being advised to take a TTR pension and salary sacrifice to the maximum.

It is on the TTR strategy where the government's claim of “only hitting the top four per cent of income earners” is a complete fallacy.

I have several clients, of literally average means, who were using TTR/salary sacrifice strategies, that could make them $10,000 a year or more or so.

Some of these people only earned $60,000-80,000 a year. And might have only had $100,000-200,000 in super. But if they used TTR/sal sac strategies properly, they were being able to lift their super fund balances by $50,000-$100,000 or more in the run up to retirement. That's not huge in the scheme of things, but certainly allowed those couples a bigger tax-free income stream, to the tune of a few thousand dollars a year.

How do you get around it?

By not having a TTR pension. By having, instead, an allocated pension (AP), which is essentially made up of unrestricted non-preserved entitlements.

TTRs are supposed to be for those over preservation age (currently 56), but under age 65, who are still working. So it will become more important to switch a TTR into an AP at the earliest opportunity.

How do you do this? We're getting into some technical details here, but you can change a TTR pension to an allocated pension (AP) if you retire, or change jobs after age 60.

There has been no mention of a change to those rules as yet.

You can often (but not always) do this as you change jobs after age 60. As you leave one job, you decide not to work again (retire), but change your mind a few months later when you decide that you're bored in retirement, or that you don't have enough money to last you through retirement, for example.

For those who are self-employed, the answer could be to retire from one of your roles, particularly if you have multiple roles or directorships. This will work under the current system, but we need to see the fine print of the government's changes.

If you qualify under this style of rule, you could change your TTR pension to an allocated pension, which would turn your pension fund back into a tax-free fund. The Government is only talking about taxing TTR pensions (not allocated pensions for those under 65).

Don't panic!

There are so many things that are undecided. First among those is that the polls are not suggesting a clear winner in the federal election on July 2.  Second, whoever gets in will still need to get a majority to get their ideas through parliament.

If you are currently on a TTR pension, don't panic. Keep doing what you're doing. The new rules won't kick in, even if the Turnbull Government is returned with a majority in both houses, until 1 July 2017.

And if you know you should have already started a TTR pension, then seek advice about starting one. You might save yourself $10-20k in the next 12 months, still.