Transition to retirement
The term 'transition to retirement' initially referred to the reaching preservation age condition of release. That term is now more closely associated with the strategies that have developed from the ability to access super while still working.
The two most common TTR strategies are:
- TTR strategy 1: reduce working hours and top up cash flow with income from a TTR pension, or
- TTR strategy 2: continue working, salary sacrifice employment income, and top up cash flow from a TTR pension.
TTR strategies and 2017 super reform
Prior to 1 July 2017
Prior to 1 July 2017, the TTR strategy of continuing to work, while salary sacrificing employment income, and topping up cash flow from a TTR income stream, provided two separate benefits:
- earnings on TTR income stream assets were exempt from tax
- TTR income stream payments may be more concessionally taxed than the salary they replaced.
From 1 July 2017
From 1 July 2017, the tax effectiveness of this TTR strategy was reduced. The three main super reforms that negatively impacted this TTR strategy are:
- assessable income and capital gains on assets supporting TTR income streams being subject to 15% taxation
- reduction in the concessional contributions cap to $25,000, and
- reduction in Division 293 income threshold to $250,000.
On a positive note, the ability for employees to make personal concessional contributions from 1 July 2017 without having to meet a 10% test may allow members who were previously unable to make concessional contributions (eg because their employer did not allow salary sacrifice contributions) to take advantage of a TTR strategy.
Impact of 2017 super reforms on TTR strategies
The benefit of a TTR strategy has been dramatically reduced from 1 July 2017, both due to the taxation of TTR earnings and reduction in concessional cap:
- Members under 60 gain only a small/marginal benefit by undertaking TTR strategies under the new rules, unless they have a large tax-free component.
- Members age 60 or over still benefit to a reasonable extent from a TTR strategy as long as they have some concessional cap available.
- Higher income employees are likely to benefit less than lower income employees from a TTR strategy, as the amount of concessional cap available is reduced by SG.
- Low income members may benefit from TTR strategies, particularly where they involve non-concessional contributions (to access co-contribution), spouse contributions (to access spouse contribution tax offset) or concessional contributions (to access low income superannuation tax offset).
- TTR strategies work better for self-employed people who do not receive SG, as their entire concessional cap is available for use under the strategy.
- Due to the concessional cap reduction, the maximum amount that a member should use to commence a TTR strategy has significantly reduced under the new rules.
- Where a TTR strategy is used to equalise superannuation balances, pay off debt or fund concessional contributions into a spouse's superannuation account, the effectiveness of a TTR strategy can be significantly improved.
Last modified: Wednesday, July 24, 2019