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How to save tax and boost your SMSF

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Once a member of a self-managed super fund (SMSF) hits preservation age, they should check if a transition-to-retirement (TTR) pension strategy is worth pursuing.

It can save tax and boost super. At 60, the benefits are more compelling.

The TTR pension was introduced to help people in the lead-up to retirement cut down on work hours and supplement their pay with a pension income.

smsf ttr

Previously you could access super only at 65 or retirement.

But many people use a TTR pension to minimise tax and boost super while working full time.

The strategy involves moving most of the super balance into a retirement account, increasing how much is salary sacrificed into super, and drawing down a pension income, as required by the rules, of between 4% to 10%.

The tax savings arise in three ways:

- Employer and salary sacrifice super contributions are taxed at 15%, which is lower than most people's marginal tax rate.

- Pension-phase earnings are tax free while earnings in super are taxed at 15%.

- From 60, pension income is tax free. Between 55 and 60 there is a tax rebate.

The savings will depend on your marginal tax rate, age, account balance and fund's earnings rate.

That's why it's important to get your accountant or adviser to check whether a TTR pension stacks up.

"For people under 60, the TTRP has to be looked at carefully," says Max Newnham, an SMSF specialist and founder of smsfsurvivalcentre.com.au.

"If you are 60 or older, it can be worthwhile.

"Take someone who is 60 or older and has $200,000 in super and they can get $8000 (4%) as a minimum pension tax free. That equates to a before-tax salary of roughly $12,600 assuming a 36.5% tax rate.

"If they salary sacrifice $12,600 into super, $10,709 is left in super after taking into account the 15% super contributions tax. So $8000 has come out but $10,709 has gone in. So that person is better off by $2709.

"Plus, if you assume an earnings rate of 6%, or $12,000, they are also better off by the 15% earnings tax of $1800 that the super fund would've paid had it not been in pension phase."

Don't draw down more than goes into super.

"Someone would think of using the strategy to increase their super, not decrease it. You don't want to have the money come out at too great a rate," says Newnham. An SMSF member can recontribute the drawdown into super tax free (within the non-concessional cap).

Andrew Yee, director of personal wealth at HLB Mann Judd, says a TTR pension is especially beneficial for high income earners with big balances.

"The more you can salary sacrifice into super, the greater the personal tax saving becomes."

The government has indicated it may cut super concessions that favour the wealthy but will take it to the next election. Anyone on a TTRP is likely to be protected as existing benefits are normally grandfathered.

No need to split assets

What happens if one member of an SMSF wants to start a transition-to-retirement pension and another doesn't?

"The members don't need to split the assets," says HLB Mann Judd's Andrew Yee.

"The fund runs as normal and the assets remain the same. At the end of the year the actuary tells the trustees how much of the fund's profit is taxable and how much is tax free and which member it relates to."

Specialist Max Newnham says it's common for SMSF members to keep assets pooled.

"Each member will have their own accumulation account. The accountant will keep track of what the opening balance was and keep track of what deposits have been made for each member. Then the profits from the assets get split in accordance with their opening balances."

Some SMSFs segregate assets.

"Each member has their own asset and the income from each asset is related to their account," says Newnham. "It's normally advisable only if there is a distinct tax advantage that can be obtained that will outweigh the extra admin costs."

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Vita Palestrant was the editor of the Money section of The Sydney Morning Herald and The Age. She has worked on major metropolitan newspapers here and overseas and has won several prestigious journalism awards including the 2001 Citigroup Award for Excellence in Journalism, Personal Finance Category.
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