Transition to retirement tax strategies

Article

Setting a tax strategy for your clients before they start their transition to retirement (TtR) pension is an important step in helping them increase both their savings and their super.

Understanding pension types

Account-based pensions may either be retirement phase pensions or TtR pensions. The difference between the two types of pensions is primarily the way in which they are internally taxed:

Retirement phase pensions

This type of pension can be commenced when a super fund member has met a full condition of release, and is not taxed on it’s earnings including capital gains.

Transition to retirement (TtR) pensions

Since 1 July 2017, TtR pensions can be commenced once a super fund member reaches preservation age, and are now taxed up to 15% on the earnings including capital gains. This means they are no longer as tax effective as they were prior to 1 July 2017.

Tax implications of a TtR pension

The tax treatment of income payments from a TtR pension hasn’t changed:

  • If your client is 60 or over when they receive income payments from a TtR, the income payments are still tax free where the super fund is a taxed scheme.
  • If your client is under age 60, the taxable portion is taxed at their marginal tax rate less a 15% tax offset.

Despite the change to the taxation treatment of TtR pensions, some clients may still have a purpose for having a TtR pension. In situations where a client has reached their preservation age but has not yet retired, a TtR pension can provide them with additional income if they require it. This was the initial intention of the transition to retirement condition of release.

The below case study demonstrates how a client can use a TtR pension to receive additional income:

Jenny, aged 58

Jenny is single and aged 58. She works four days a week in day care and earns $43,000 per annum. After tax, her gross income is $37,678. She is finding it difficult to afford her lifestyle and expenses. Jenny has $220,000 all taxable component in her superannuation account.

Using a TtR pension, Jenny can receive additional income up to $22,000 in this financial year. After tax, this will provide her with a net income up to $55,433.

TtR income swap strategies

There may still also be a benefit for clients to make pre-tax contributions into super and replace that income with TtR pension income. When using an income swap strategy, it’s important to remember that personal deductible and salary sacrifice contributions are taxed at 15% on the way into super, and possibly at 30% if your client has income* and low tax contributions over $250,000 in a financial year.

Also, personal deductible contributions and salary sacrificed contributions count towards the client’s concessional contributions cap as do super guarantee (SG) contributions.

Explore case studies 

The following case studies illustrate the taxation consequences of clients making pre-tax contributions into super and drawing out income from a transition to retirement pension.

Clients under age 60

Marie, aged 57

Marie, aged 57 has $280,000 in super, all taxable component. Marie earns $80,000 per annum. After tax her net income is $61,933^. Marie salary sacrifices $17,400 (up to her concessional cap of $25,000) into super and draws $14,158 from a TtR pension, giving her a net income of $61,933.

As a result of the strategy, Marie saves $632^ personally in tax which is reflected by a $632 increase to her overall super balance.

Bill, aged 58

Bill, aged 58 has $350,000 in super. Of this, $180,000 forms part of the tax-free component and $170,000 forms part of the taxable component. He earns $100,000 in salary. After tax his net income is $74,283^. Bill salary sacrifices $15,500 (up to his concessional cap of $25,000) into super and rolls $270,000 into a TtR pension.

He draws the minimum pension amount of $10,800 from the TtR pension. This gives him a net income of $74,658. As a result of the strategy, Bill’s overall tax reduces by $2,750^. This is reflected by a $2,375 increase to his overall super balance, plus a $375 increase to his personal cashflow.

Clients over age 60

Sean, aged 61

Sean, aged 61 has $200,000 in super, all taxable component. He earns $75,000 in salary per annum. After tax his net income is $58,658^. Sean salary sacrifices $17,875 (up to his concessional cap of $25,000) and draws $11,565 from a TtR pension, giving him net income of $58,658.

As a result of the strategy, Sean’s overall tax reduces by $3,629^ which is reflected by a $3,629 increase to his overall super balance.

Claire, aged 62 (impacted by Division 293 tax)

Claire, aged 62 has $500,000 in super, all taxable component. She earns $260,000 in salary. Claire’s employer makes SG contributions of $21,003. After tax her net income is $161,553^ including Division 293 tax (assuming she does not elect to release an amount from super to pay this).

Claire salary sacrifices $3,997 (up to her concessional cap of $25,000) into super and she rolls $80,000 into a TtR pension. Claire is taxed an extra 15% on her SG and salary sacrificed contributions (equalling 30% in total) due to Division 293 tax.

She draws the minimum pension amount of $3,200 from the TtR pension. This  gives her a net income of $162,035. As a result of the strategy, Claire’s overall tax reduces by $680^. This is reflected by an $197 increase to her overall super balance.

T&Cs: ^Based on 2019/20 tax rates including Medicare levy and takes into account client paying contributions tax of 15% 

* Income includes:
- taxable income
- reportable fringe benefits
- total net investment losses, and
- low-tax contributions (ie. concessional contributions less any excess contributions, plus contributions for defined benefit interests).

Things to consider before commencing a TtR pension

For some clients, there may still be a purpose for commencing a transition to retirement (TtR) pension after 1 July 2017. However, before commencing a TtR pension, the following should be considered: 

  • Centrelink/DVA implications – TtR pensions count under the assets and income test whereas money held in accumulation does not count if the client is under age pension age
  • Cost of implementing the strategy and whether the benefits outweigh the fees and transaction costs if the client is using an income swap strategy
  • Contributions tax payable on concessional contributions
  • Division 293 tax which may be payable on personal deductible and employer contributions
  • The concessional contributions cap and super guarantee (SG) amounts
  • TtR income payments must be within the minimum and maximum amounts.

For any retirement planning queries, please contact a BDM.

 

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FOR ADVISER USE ONLY

This publication is current as at 1 July 2019, and has been prepared by BT, a part of Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian Credit Licence 233714 (Westpac). This publication has been prepared for the information of financial advisers only. It must not be copied, used, reproduced or otherwise distributed or made available to any retail client or third party, or attributed to any company in the Westpac Group. The information contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. This publication has been prepared without taking into account any person’s objectives, financial situation or needs. Because of this, you should, before acting on any information contained in this publication, consider its appropriateness to your clients, having regard to their objectives, financial situation or needs. The Westpac Group cannot give tax advice. Any taxation considerations outlined in this publication are general statements, based on an interpretation of current tax laws, and do not constitute tax advice. As such this publication should only be used as a guide. Each individual client’s situation may differ, and your client should seek independent professional taxation advice on any taxation matters. Any case study or example contained in this publication is for illustrative purposes only, and is not to be construed as an indication or prediction of future performance or results. While the information contained in this publication may contain or be based on information obtained from sources believed to be reliable, it may not have been independently verified. Where information contained in this publication contains material provided directly by third parties it is given in good faith and has been derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, the Westpac Group accepts no responsibility for the accuracy or completeness of, nor does it endorse any such third party material. To the maximum extent permitted by law, we intend by this notice to exclude liability for this third party material. Commonwealth material in this publication is subject to copyright and reproduced by permission, but does not claim to be the official or authorised version. It is not the intention of any member of the Westpac Group that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. To the maximum extent permitted by law: (a) no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up to date or fit for any purpose; and (b) no member of the Westpac Group is in any way liable to you (including for negligence) in respect of any reliance upon such information.