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The winners and losers of the TTR pension changes

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Transition to retirement (TTR) pensions have long been, and remain, attractive for investors who have reached super preservation age (56 years now but increasing to 60).

This is because the TTR pensions offer tax-free earnings on the pension balance and concessionally taxed income.

With a TTR pension, up to 10% of the account balance may be drawn as income each year. The pension income can be used to meet normal living expenses. However, more usually it is used to fund salary sacrifice contributions to super, which provides additional tax savings.

ttr transition to retirement pension changes winners and losers

Three major changes proposed in the 2016-17 federal budget will take place after the July election if the relevant legislation is passed by both houses of parliament.

The concessional super contributions cap will be reduced from $30,000 or $35,000 a year (depending on age) to $25,000, investment earnings in a TTR pension account will be taxed at 15% (in line with super generally) rather than being tax-free, and "catch-up" concessional contributions will be introduced.

Currently the concessional contributions cap is available on an annual "use it or lose it" basis.

Following these changes, a TTR pension account will still serve as a vehicle to access capital. Investors will still be able to reduce debt, fund living expenses if working part-time or pay for a capital expense.

Overall, investors will now be more likely to start a TTR pension to achieve a target level of income, as opposed to rolling over as much as possible to gain tax-free earnings. The changes will produce both winners and losers among investors.

In spite of the loss of tax-free earnings, a TTR strategy can still deliver substantial tax benefits for super members.

If you are aged over 60 and do not currently make salary sacrifice super contributions, the tax savings will continue to be up to $2000pa or more where your annual income is between $40,000 and $200,000.

For some investors with annual incomes between $60,000 and $100,000, the tax benefits available from a TTR strategy will generally exceed $3500pa.

Investors who are able to take advantage of the "catch-up" concessional super contributions after July 1, 2017, will be able to achieve additional tax savings.

If you have an existing TTR strategy in place and the new legislation is ultimately passed by federal parliament, you should talk to your financial planner about how it impacts you.

For those approaching 60, a TTR pension will be a tax-effective strategy for most people.

As you approach this important milestone, you should talk to your financial planner or super fund on how to maximise the income you receive in retirement by implementing a TTR strategy.

Winners Losers
  • Investors who are currently using a small amount of their concessional super contributions cap. They may be able to take advantage of the "catch-up" contributions in the future.
  • Investors with high account balances, who will lose tax-free earnings.
  • Investors who already maximise their super salary sacrifice contributions without the need for extra income. From July 1, 2017, these people are unlikely to benefit from a TTR pension.
  • Investors who are under 60. From July 1, 2017, these people will cease to benefit from tax-free earnings on their TTR pension account balance.

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