06
June
2016

Do the budget changes mean the end?

of the Transition to Retirement Strategy?

The proposed federal budget changes have gained a lot of attention in the media over the last few weeks.  One of the key discussion points is the effect on the Transition to Retirement (TTR) income swap strategy, currently the staple method for pre-retirees to accelerate retirement savings.

Despite some doomsday predictions claiming this to be the end of the strategy, there is still definitely a benefit, however this benefit has been substantially reduced.

Currently the benefits of Transition to Retirement (TTR) as a tax reduction strategy are two-fold.  The first benefit is gained by taking advantage of the different taxation treatment between funds in accumulation phase and pension phase.  Income on Superannuation accumulation funds are taxed at 15% and Capital Gains are taxed at 10%, however once in Pension phase there is no tax on earnings at all.

One of the proposed federal budget changes is to treat funds invested in Transition to Retirement (TTR) pensions as accumulation funds (for tax purposes) instead of as Pension fund as they are currently, this obviously eliminates this benefit of the TTR strategy.

The other advantage of the TTR strategy is the income swap strategy. This is effectively swapping income taxed at marginal tax rates for pension income which is tax free once over the age of 60 and receives a tax rebate before this point.  This strategy utilises an allocated pension in conjunction with salary sacrifice to achieve the income swap.

This benefit remains, and still serves as a method to reduce taxation and increase retirement savings, so the TTR strategy will continue to be a popular strategy for pre-retirees.

The reduction of the Contribution Caps from $35,000 to $25,000 will limit the extent that pre-retirees will be able to utilise the income swap.  The TTR rules allow those who have met preservation age to withdraw up to 10% of their superannuation balance, and, if utilising income swap strategy, will be salary sacrificing this amount (as well as the tax saving in most cases) back into their super. For many this, combined with existing employer contributions, will exceed new $25,000 limit, in effect restricting the potential tax savings.

These changes are proposed to commence July 1 2017.  For those with existing TTR strategies in place, it is best to speak to your financial adviser to see if the changes are going to impact on your strategy.

 

Although the changes to the budget limit the power of the TTR, it is still an effective method to accelerate retirement savings and should be considered by those of preservation age (currently 56 and over) who would like to increase their retirement savings.

Author; Alex McKenzie Categories: Future Financial Services Blog

About the Author

Alex McKenzie

Alex McKenzie

Owner at Future Financial Services

Past:

  • Paraplanner at Zammit Partners Investments
  • Unit Trust Administrator at Colonial First State

Education

  • University of Western Sydney
  • Penrith High

About

As a Financial Planner I help people to achieve what they would like in life. This involves helping you to identify the things in life they would like , developing plans to help achieve them and strategies to protect what you already have. We do this by providing Financial Advice to guide you through your life stages.

The financial planning process involves determining a clients current situation and financial objectives and tailoring strategies to assist in best achieving those objectives.

I am an expert in superannuation, investments and insurance, these are tools we use to help you achieve your goals.

I aim to use my knowledge of superannuation, taxation and Centrelink to efficiently use your assets and income to achieve your financial goals.

Retirement and pre-retirement planning, wealth creation, asset protection, insurance planning and estate planning are all areas of advice that I provide.

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