After my last blog article I have been asked for some guidance on how to maximise the Transition to Retirement (TTR) & Salary Sacrifice strategy under the new SG and Concessional Contribution (CC) limits for those over 59. Also readers wanted to know more about the “resetting” pensions to move each year’s contributions to Pension phase.
This general advice applies equally to those using an Self Managed Superannuation fund (SMSF) , Industry, Retail or Employer fund.
Resetting the pension periodically (eg annually) from age 60, can help TTR users to get more money into a tax-free environment. Also, the additional income payments, which would be tax-free, could be re-contributed into super by utilising any remaining CC cap or by making non-concessional contributions (NCCs).
Example: Strategy Changes for those age 59 or over
When strategy commenced Marie, an Administration Manager in Castle Hill, is 60 years of age and earns a salary of $90,000 pa plus Employer SG for a total package of $98,100. On 1 July 2012, she:
- used her entire super balance of $250,000 to start a TTR pension
- based on our recommendations elected to receive TTR pension payments of $10,703, and
- arranged with her employer to salary sacrifice $16,900 in to super to use up her full $25,000 limit applying that year.
The key point to mention is that using this strategy Marie maintained her exact same after-tax income but selected it from the most tax effective sources..
Then we had the latest government changes to Super from the Budget.
- SG increased to 9.25%
- Concessional Contribution limit for those over 59 on 01 July 2013 increased to $35,000
So strategy changes were needed. On 30 June 2013, she had $22,101 in her accumulation account and $260,387 in her pension. On 1 July 2013, she:
- stopped her current TTR pension, merged the money with her accumulation balance and started a new TTR pension with $282,488. (Resetting)
- elected to receive pension payments of $17,105 from the Transition to Retirement pension, and
- increased her salary sacrifice contributions to $26,675 again to use up the $35,000 limit and maintain the same Net Take Home Pay.
The outcome
The table below summarises her income and super contributions in 2012/13 (with and without using the TTR strategy) and the changes she made in 2013/14 in response to the super changes.
In 2012/13 |
Adjustments in 2013/14 | ||
No TTR | With TTR | with TTR | |
Salary |
$90,000 |
$73,100 |
$63,325 |
TTR Income | Nil |
$10,703 |
$17,105 |
Tax |
-$22,597 |
-$16,400 |
-$13,027 |
Net Take Home Income |
$67,403 |
$67,403 |
$67,403 |
SG |
$8,100 |
$8,100 |
$8,325 |
Salary Sacrifice | Nil |
$16,900 |
$26,675 |
Total CCs* |
$8,100 |
$25,000 |
$35,000 |
*CCs = concessional contributions (SG + Salary sacrifice or Self Employed Contributions)
By making the adjustments, she will:
- get an extra $22,101 into the tax-exempt pension to take greater advantage of the 0% tax rate that’s payable in the fund on investment earnings
- salary sacrifice an extra $9,775 into super taxed at 15% instead of her marginal 38.5% rate
- take full advantage of the higher Concessional cap of $35,000, but also taking into account the SG increase to 9.25%
- reduce her income tax by $3,373
- reduce the total tax paid by $1,873, after taking into account the 15% tax that will be deducted from the additional $10,000 of concessional contributions, and
- maintain the same after-tax income or net take home pay
Marie can also restart her pension at the beginning of each financial year until she retires at age 65 to maximise the amount in pension phase and make any further changes required as a result of future rule changes.
This is a strategy that has very little to do with the actual investments in your fund so you can see it as a “low/no risk” strategy that enhances your retirement savings without taking on additional investment risk.
Now to make the most of the tax-exempt pension environment you may alter your investments to seek more income or franking credits but it is not compulsory.
It’s not too late to get your plan in place for 2013/14 tax year so why not click here to Schedule a Meeting by phone, face to face or via Skype if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or online via Skype.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
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