Super strategy a boon for the well-off

The transition to retirement strategy has become a way for the well-off to avoid tax, writes John Collett.

The transition to retirement strategy (TTR) is another of former treasurer Peter Costello's well-intentioned super changes that have become a way for the well-off to avoid tax.

To take advantage of TTR you must have reached the superannuation "preservation" age; the age at which super savings can be withdrawn as an income stream.

The "transition to retirement" strategy mainly benefits wealthy people.
The "transition to retirement" strategy mainly benefits wealthy people. Photo: iStock

That can be anywhere between age 55 and 60 depending on your date of birth.

The idea is to draw income from your super (by starting a pension) while also salary sacrificing pre-tax income into super to replenish it.

For over-50s, the cap or limit for salary sacrificing is $35,000 a year (technically, the cap is for those aged 49 years or over on 30 June 2015).

The cap includes the 9.5 per cent compulsory super contribution.


Effectively it means that income from the pension replaces money salary-sacrificed with take-home pay remaining the same.

The marginal income tax rate that would have been paid on the sacrificed salary is replaced by the lower super contributions tax.

There is no tax on earnings inside a pension account. And, for over-60s there is no tax payable on the pension income.

To take advantage of the strategy for tax minimisation there needs to be a super account balance of sufficient size.

There is a 10 per cent limit to how much can be taken out of super each year under a TTR strategy.

Most people want to maintain their take-home pay and the maximum they can sacrifice is $35,000, less the 9.5 compulsory super.

Very generally, as it will depend on individual circumstances, after-tax income would be hard to maintain with super balances less than somewhere between about $350,000 and $250,000.

The banks and insurers that employ the advisers produce case studies showing how much he or she will be better off with the strategy.

However, the "benefits", if any, are usually only small for those with small account balances and even more so once costs as included, which the case studies do not show.

Self-managed superannuation fund trustees, many of whom are higher earners with larger balances, are the biggest users of the strategy.

For them, arranging a transition-to-retirement strategy usually requires an inexpensive certificate from an actuary.

Those without self-managed funds would generally use a financial adviser to implement the strategy and pay fees for the advice.

The strategy is ideal for those on who want to step back from full-time work as they get older.

For these people it is not about reducing tax. It simply allows them to start drawing their super to help them make up for the fall in their income.

Philip La Greca​, national manager of SMSF technical solutions at Multiport, says if the aim of the policy is to help people transition from full-time to part-time employment, then those using TTR should only be allowed to have compulsory contributions going into their super.

That would help ensure the strategy was only used by those genuinely transitioning to retirement. They could continue to make non-concessional contributions as tax has already been paid on the money, La Greca says.

Twitter: @jcollett_money