You could almost feel the wave of disappointment go through the financial planning community after the May 2016 federal budget, when the Coalition Government changed the transition-to-retirement rules.
Before the changes, TTRs were a popular strategy to help pre-retirees build wealth. And they can still work for some clients who truly are transitioning out of the workforce.
Tim Howard, who looks after technical advice at BT Financial Group, says he expects TTRs to be a lot less popular after July 1 this year, when the changes come into force.
“Fewer TTRs are being started now,” Howard says. “But if your client already has one in place, there might be merit in retaining it. It can still be worthwhile if you are benefiting from the drawdown, reducing your working hours and supplementing your income with the TTR strategy. Using the drawdown to accelerate debt repayments may be a reason to continue a TTR.”
Andrew Yee, director, superannuation, with HLB Mann Judd, agrees that TTRs can still make sense if a client is transitioning from full-time employment to part-time work and needs a pension payment from their super fund to supplement their income.
“It can work if their personal income and tax position remain the same,” Yee says. “But now the super fund will pay tax on income from assets paying the TTR pension.”
Let’s say the client is older than 60, salary-sacrificing employer super contributions into their fund and drawing a TTR pension from the fund to replace income lost through dropping down from full-time to part-time work.
Yee explains: “As they are over 60, their pension payments are still tax free post-July 1. But the income in the fund on assets paying the TTR pension will be taxable. There will be a lesser tax benefit but overall they are likely to be better off financially. [However,] you need to do the numbers beforehand.”
He says if someone under age 60 had mainly tax free-component super benefits in their fund, their pension payments would also be mainly tax free. So they could end up in a similar position to someone older than 60.
In some circumstances, however, it could make sense for the fund to return to accumulation stage.
“If you are between 55 and 60 years of age, it could be the case that the tax on income from the pension, combined with the earnings tax within the fund, outweighs the benefit of retaining the TTR,” says David Reed, from The Retirement Advice Centre.
“This may [mean you should commute the TTR and move] back to accumulation phase with the fund,” adds Reed, who says he is spending time with clients analysing the benefits of the TTR in detail. “If the employer is paying only the superannuation guarantee on your taxable income, then [the TTR] could result in a lower employer contribution going into your fund when you are salary-sacrificing.”
Previously, where the pension fund did not have to pay earnings tax and it was a sizeable fund, then the benefits outweighed the lower employer contribution.
“That all changes next year, requiring analysis of whether the TTR is suitable in those circumstances,” Reed says.
The main message for advisers is to start reviewing TTR clients now to ensure they are in the best position possible come July 1.
