Turbo charge your retirement savings with TTR

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Turbo charge your retirement savings with TTR

Not ready to stop working? No problems. You can ease into retirement using your super. Being 55 or older means that it may be possible to access superannuation without having to retire. This strategy is known as a Transition To Retirement pension (or TTR for short!).

Having reached preservation age, 55, it is possible to elect to transfer all or part of a superannuation balance to a non- commutable pension. This pays an income stream -and generally does not allow the withdrawal of a lump sum- without having to first retire. These rules allow different strategies including:

Reducing working hours without having to reduce income or lifestyle,

or Leaving working hours unchanged but putting more salary into super.

There is no limit on how much of the super’s accumulated balance can be transferred into a TTR and there is normally a similarly wide range of investment options including direct shares, managed funds and term deposits from which to choose.

The pension is withdrawn from the pension account and earnings from the investments are added to the account. The account balance goes up or down depending whether the investment earnings achieved are greater or lesser than the withdrawals.

There is a compulsory minimum amount that must be withdrawn each year and also a set maximum level of withdrawal per financial year. Currently, the minimum pension is 4% p.a. of the account balance, pro-rata by the number of days should the pension begin part way through a financial year, and is recalculated at 1 July each year thereafter. The pension can be varied between this minimum and the maximum of 10% at any time. However, generally, you cannot withdraw a lump sum, only take a pension within those limits. The pension can be taken on a discretionary basis – monthly, quarterly, 6 monthly or yearly – as long as at least the minimum is withdrawn each financial year.

The pension can be changed or even stopped at any time. It can be rolled back to the normal super account and even re-started again with the same or a different amount. A TTR pension strategy can suit many people but generally works best for those who are:

  • At or over preservation age – generally 55 or older;
  • Still working full time;
  • Have some existing super;
  • Want to reduce their work commitment; or
  • Want to fast track their retirement saving before full time retirement.

A TTR strategy can have many benefits. There are the obvious ones of being able to ease into retirement without necessarily impinging on the current lifestyle and thereby enjoying the best of both worlds as a semi-retiree.

However, there can be some real investment and tax advantages as well. To begin with, the TTR pension account does not pay the normal 15% superannuation tax on investment earnings.

This means that investments accumulate tax free within the fund. From age 60 onwards, the TTR pension payment is tax free in the member’s hands as well – a real boost! Between 55 and 59, the TTR pension, where taxable, is taxable at the member’s marginal tax rate LESS a 15% tax rebate.

Combining a TTR strategy with a salary sacrifice arrangement into super can be an effective strategy. In essence you reduce your salary (where you may be paying a higher marginal tax rate) and replace this income with a pension income stream (which may have a zero or lower tax rate). The reduction in your salary is added to your superannuation account.

Case Study – John is 55, married and earns $75,000 p.a. His wife is not working and all the kids are off their hands. He has $250,000 in his super fund and they decide to put in place a TTR pension strategy combined with a salary sacrifice arrangement ensuring that they have the same take home pay.

As a result, John is able to:

  • Increase his contributions to super up to the maximum concessional limit;
  • Keep take home pay at the same level as prior to implementing the TTR strategy;
  • Based on the assumption below, potentially increase his super balance after the first year by $4,880 and by $89,000 at age 65.

Assumptions: TTR Pension earning rate at 5%p.a. Super accumulation account earning 4% pa. Gross salary of $75,000 pa equates to take home pay of $53,316 p.a. John has $250,000 (25% tax free component) in super. Salary and take home pay assumed to increase by 3.5% p.a. John begins the pension on 1/07/2013 and retires on 1/07/2022. Calculations by NetActuary

Want to know more?   Call AIP Wealth on 07 3188 5757.

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