Transition to Retirement pensions

Superannuation strategies for SMSF trustees.

Before Transition to Retirement (TTR) pensions were introduced, a person had to retire before accessing preserved superannuation benefits. When they were introduced, TTR pensions were designed to be used by people who wanted to work part time but needed to supplement their employment income by drawing down on their superannuation.

Previously, people who wanted to do this had to resign, advise their superannuation fund they had retired and did not intend working again, find out that they could not manage on the income paid by their superannuation, then return to either full or part-time employment.

When TTR pensions were introduced, a new condition of release was created as long as the pension paid could not be converted to cash while the superannuation member remained working. The TTR pension was designed to allow people to continue working part-time and access a non-commutable pension. But as working part-time was not defined, a person could remain in full-time employment and access a TTR pension.

The tax and super benefits of starting a TTR pension are not as great for people under 60, and have reduced for everyone due to income earned to fund a TTR pension no longer being tax free from July 1, 2017.

There are several benefits to a person starting a TTR pension, including:

  • being paid a super pension, any tax payable is reduced by the super pension rebate of 15 per cent
  • where a member's super balance is made up of tax-free benefits, a portion of the pension is received tax free
  • because there is more after-tax income received by the member, the member can sacrifice a greater amount of salary or wage as a super contribution

There can be one disadvantage of this strategy depending on who your employer is. In some cases employers reduce their compulsory employer SGC contributions as a result of an employee sacrificing salary or wages as extra superannuation contributions.

Example of how a TTR pension strategy works

James Fleming, who is 55 and works for an import/export business on a salary of $90,000 a year. James has $300,000 in his SMSF, made up of $200,000 in taxable benefits and $100,000 in tax-free benefits.

He wants to increase his superannuation benefits by starting a TTR pension of $15,000 a year. This will be made up of an assessable TTR pension of $10,000 and a tax-free pension of $5,000. In addition he salary sacrifices $15,000 as an extra superannuation contribution.

Before implementing this strategy, James produced the following income after tax:

 

$

Salary

90,000

Tax and Medicare levy payable

23,047

Net salary received

66,953

By implementing the TTR strategy, James now has the following income after tax:

 

$

$

Salary

 

75,000

Assessable TTR pension

 

10,000

Assessable income

 

85,000

Less tax and Medicare levy payable

21,097

 

Reduction due to 15 per cent pension rebate

1,500

 

Net tax payable

 

19,597

   

65,403

Add tax-free pension

 

5,000

Net salary and pension received

 

70,403

His after-tax income has increased by $3,450 and he is contributing an extra $15,000 a year to superannuation. If the increased after tax salary of $3,450 was made as a non-concessional contribution, the fund would be better off each year by $1,200.

Documentation and Actions Required

  • Contact your employer to see if they allow you to sacrifice some of the salary as extra superannuation.
  • Calculate how much salary can be sacrificed without breaching the concessional contribution limit, currently $35,000 for people 50 and over and $30,000 for everyone else, but will be $25,000 for everyone after July 1, 2017.
  • Letter from member requesting a TTR pension commence payable at least at the minimum payment rate required.
  • Resolution by trustee/s acknowledging receipt of request for a TTR pension and approving it for payment.
  • Letter from trustee/s to member advising that the TTR pension will be paid and its components.
  • Trustee/s complete ATO documentation to register for PAYG withholding tax.
  • Trustees calculate PAYG withholding tax to be deducted and set up regular payments direct from SMSF bank account.
  • If PAYG withholding tax has been deducted once a quarter trustee/s complete PAYG withholding statement paying amount withheld to ATO.

Warning

Before using this strategy you should seek professional advice as to whether you will actually benefit from following the strategy and will not end up worse off if the strategy does not really apply to you.

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