If you are in or nearing your 50s and unsure of whether you have enough savings to retire on or simply want to accelerate your retirement savings, making use of a Transition to Retirement Pension (TTRP) can be a very effective strategy writes Campbell Korff from Yellow Brick Road Management.
Since 2005, the superannuation rules have allowed people nearing retirement to supplement their income by drawing up to 10% (and a minimum of 4%) as a TTRP. The rationale is to encourage people to work longer by allowing them to reduce their hours and top-up their income from superannuation.
However, for those willing to continue to work full-time through their 50s and 60s, these rules present an opportunity to take advantage of the highly favourable tax concessions applicable to superannuation contributions, earnings and income.
The basic strategy is to salary sacrifice as much as you can into superannuation (up to $35,000 if you are over 50) and draw back out of superannuation only what you need to live on as a TTRP. This strategy can also be used by self- employed persons in a similar manner.
The main benefits of implementing a TTR strategy are:
- Pre-tax income contributed to superannuation (within the Concessional Contributions Cap) is taxed at 15%, instead of your marginal income tax rate if you do not save into superannuation. In many cases, more than halving the income tax rate on the amount contributed;
- Earnings tax paid inside of superannuation can be eliminated by using a TTRP. This effectively adds 15% to the performance of your retirement savings each year;
- Tax friendly income derived from the TTRP will allow you to salary sacrifice more into superannuation than you need to take out. Income derived from a TTRP is generally more tax effective than income received from working, especially after age 60. This can open up an ‘arbitrage situation’ where the amount needed to draw from the pension is much less than the amount needed to replace it via salary sacrifice;
- The TTR strategy can result in lower taxable and assessable income. This can enhance the ability to qualify for tax offsets such as Mature Age Tax Offset (MATO) and Low Income Tax Offset (LITO);
- The strategy can be completely unwound (i.e. funds rolled back to superannuation);
- The level of income received can be adjusted between minimum and maximum levels; and
- This is a tax driven strategy. This means it is not reliant on strong market performances to make it a successful strategy.
If you would like more information on preparing for or implementing a TTR strategy, contact your wealth manager.
If you would like more information on these issues, drop me an email at [email protected]. Or visit the YBR Ballina website on: ybr.com.au/Branches/Ballina
