Transitioning to Retirement

Since July 2005, when the Transition to Retirement (‘TTR’) rules came into effect, strategies surrounding these rules have continued to grow in popularity. As the “aged pension” is gradually reduced, the aim of TTR is to ensure that people have the capacity to retire independently on their own funds. While many believe they will be able to survive with their current super plan, most don’t realise they could be a lot better off with an effective TTR Strategy.

TTR is quite a simple concept. Anyone who has reached “superannuation accessibility age” (preservation age) but does not meet the definition of retirement, can fully or partially roll over their superannuation benefits into an alternative income stream, known as a ‘non commutable income stream’. By doing so you increase their pre-tax contributions into super, which provides significant tax benefits while you are still working.

Effectively, your superannuation fund goes from accumulation phase to pension phase. With a TTR strategy you can keep working full time, or even reduce your working hours.

Why Use a TTR Strategy

Here are 4 key ways an employed person, at preservation age or over can benefit from TTR strategy:

1. By salary sacrificing more income into your super, your contributions are paid from pre-tax dollars, which may otherwise be taxed at up to 46.5%. Salary sacrificed contributions are only taxed at 15%.
2. Income streams have a 15% tax credit applied up to age 60.
3. Income streams from age 60 are completely tax free.
4. Account balances in pension phase, are exempt from tax on investment earnings, compared to the 15% tax applied in accumulation phase. Important: Similar advantages are available to self-employed persons by claiming tax deductions on their personal contributions to reduce their taxable income. The following example, is based on a 60 year old individual and compares retirement outcomes with and without a TTR strategy.

* Based on 2010/2011 tax notes.

Transition to Retirement Strategy

There are several criteria that need to be met before a superannuation fund can be transitioned to a pension fund, as well as contribution restrictions to superannuation funds.

To be eligible for a TTR strategy you must be of “preservation age”, which is determined by a persons date of birth;

Preservation Age

Preservation age varies depending on your date of birth:

Concessional contributions

There is a limit on how much you can contribute to your fund:

• $25,000 indexed to inflation, for all ages, unless a transitional limit applies.
• $50,000 transitional limit (non-indexed) for a financial year (before 1 July 2012) in which a person is aged 50 at the end of that financial year.

Minimum pension drawdown relief

The government has announced a new minimum pension drawdown, which effectively reduces the minimum annual pension payment you must draw from your fund during the 2009/2010 financial year.

For complying market-linked pensions (also known as growth pensions), the relief results in the minimum annual pension being 45% of the annual income amount as calculated on 1 July 2009.

Tax free income payments from age 60

Income payments from a retirement income stream become tax free when an individual is aged 60 or more, this significantly benefits TTR strategies.

In effect, a TTR strategy enables you to salary sacrifice current income to ensure greater retirement benefits without compromising your current net income position. If you would like more information on Transition to Retirement strategies, please contact your Australian Financial Planner or why not call us on Toll Free, 1300 00 PLAN to speak to an advisor.