| New Rules: New Opportunities |
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The transition to retirement (TTR) rules were put in place to encourage older Australians to stay working longer by encouraging them to work part-time and supplement their income needs by using some of their super savings to pay them an income. It is one of the best policy decisions in many years. The facts are that the policy is relatively simply (as simple as super laws can be), is flexible and delivers a wide range of benefits the Government probably never intended to provide. Fortunately, the Government did not remove the TTR policy as part of its budget super changes. In fact, TTR is a more attractive, especially for those retirees who are at least 60 and intend to work for a few years because, assuming the super changes are implemented as announced from July 2007, super pension payments will be tax-free and assets backing the pension will also be taxed at 0 per cent on the income. Let's look at some examples to understand how this might work.Joe Bloggs is 62 and wants to work full-time for another five to ten years. He earns $120,000 a year. He and his wife own their home and have two adult children still at home. They need $50,000 a year after tax to live on.Based on the new tax rates, Joe would be paying $35,850 in tax on his income (assuming he has no income or access to tax deductions or offsets). Effectively, his after-tax income is just over $84,000. Joe also has $800,000 in super assets. Joe's employer will allow him to salary sacrifice as much of his salary as he wants. He decides to take all his salary as super contributions and to convert his super assets to a pension and to take his income requirements tax-free. On the face of it this is a sensible idea. Under the Government's super proposal, the first $100,000 of employer contributions for people over 50 will be taxed at 15 per cent for five years, beginning in July 2007. Contributions above that will be taxed at the highest marginal rate, that is 46.5 per cent. Effectively, Joe would pay $24,300 tax. Without much thought, Joe has managed to save $11,500 tax and will have a healthier super balance when he permanently stops work and retires. But is this the best he can do?Suppose he salary sacrifices $100,000 instead and takes $20,000 as salary and reduces the pension being paid from his super assets to $31,500 a year. He will pay a total of $16,500 in tax ($15,000 contributions tax and $1,500 income tax). His family will still receive $50,000 income and he has now cut his tax bill by more than 50 percent and by a further $8,000 compared to the first option.All the additional super benefits created by the salary sacrifice contributions will be taken out tax-free. What about people who are under 60?People who were born before July 1960 who are at least 55 will be allowed to take their super savings as a pension while they are still working. However, their pension will not be tax-free but they will receive a 15 per cent rebate of tax.This means that the TTR strategy will not save as much tax as Joe has been able to do. For example, suppose a person who is 58 has exactly the same circumstances as Joe above. That is, they took $100,000 of employer contributions and $20,000 as salary and $30,000 as pension income. This would result in $20,850 in tax, including the tax on the sper contributions. This is still a very impressive result, ie $15,000 saving. So what do we need to do to implement this in a Self Managed Super Fund?Make sure that your Fund's trust deed provides the ability to pay a pension before a member is retired (most deeds generally don't allow this).Also make sure that your salary sacrifice agreement is implemented correctly. Sometimes employment agreements will limit the amount that you can contribute to super. So understanding your living and lifestyle expenditure and combining your own circumstances in respect to salary packaging can have substantial benefit potential. We are not sure this is what the Government had in mind ….. but for most, we will take it. Geoff O'Neil - Director Strategic Financial Coach |
+ 61 8 8333 1944
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