It's decision time for anybody with a transition to retirement (TTR) pension. In the past a key bonus was that your super fund became a tax-free fund once the TTR commenced, but from July 1 the ability to have a tax-free pension fund in conjunction with a TTR has been taken away.
The essence of a TTR is that you start a pension from your superannuation fund once you reach your preservation age. This gives you partial access to your super, even though you have not satisfied a condition of release such as retirement, which would enable you to withdraw your funds when you wished.
For people who have reached their preservation age the choice will be to stay in a TTR, move back to accumulation mode, or abandon the TTR altogether and switch to pension mode. Let's consider these options one by one. First, the advantage of the TTR is access to your super before you retire – the price is the compulsory withdrawal of at least 4 per cent of the balance each year. If you leave your money in accumulation mode, or change back to accumulation mode, the tax treatment will be the same as if you had a TTR, but there is no requirement to make withdrawals – or you may be able to move to pension mode, where your super fund will become a tax-free fund.
Mary is 60 and has been enjoying a TTR since she was 56. She is now partly retired and has had several casual jobs. Because she has reached 60, and has satisfied a condition of release by resigning from a paid job, she has gained full access to her super and can quit the TTR. By doing this she will achieve higher net returns in her super fund from July 1 because she moves to a tax-free fund. If you are in Mary's position, and have met a condition of release, make sure you tell your TTR provider so they can convert your fund to a normal account-based pension and apply the earnings tax exemption. If you don't do this your fund will keep paying tax on your money.
Henry is 59 and is somewhat strapped for cash, as he was a late starter and his children are still in the expensive years. His wife is 46 and her super is inaccessible because of her age. He intends to work until 65, and is drawing a TTR so he can access his superannuation to help with the school fees. A TTR remains right for him as it enables him to access up to 4 per cent of his superannuation. The tax treatment of his fund is the same from July 1 irrespective of whether it stays in accumulation mode or becomes a TTR fund.
Helen, aged 58, is a career woman with substantial funds both inside and outside the superannuation environment. Being on her own she intends to work as long as she can. For her, the obvious strategy is to leave her superannuation in accumulation mode and salary sacrifice to the maximum. Since July 1, the amount she can contribute to superannuation has been substantially reduced – there is no point in taking money out unnecessarily through a TTR.
These examples highlight the fact that there is no one-size-fits-all strategy. As always, getting advice to optimise your financial affairs is the way to go.
4 July 2017