What do the super reforms mean for you?

09-Sep-2016


With all the excitement of the federal election behind us, it’s time to start looking towards the future. Whether it’s one, five or 50 years from now, your retirement plans may need to consider the government’s latest federal budget and proposed superannuation reforms.

A FAIRER SYSTEM FOR THE FUTURE

The Treasurer, Scott Morrison, during his announcement of the changes took the opportunity to reassure Australians the reforms were designed to improve the fairness of the superannuation system for women and lower income earners. The government also hopes these changes will make sure the system isn’t being misused by the wealthy for tax minimisation or estate planning purposes.

The superannuation reforms may affect you in a number of ways, but for those thinking about transitioning to retirement, the removal of the tax exempt status for Transition to Retirement (TTR) pension earnings is particularly relevant.

Beginning your transition to retirement

You can begin your TTR pension once you’ve reached preservation age – which is currently 56 but will be increasing to 60 over time. With a TTR pension, 10 per cent of your account balance can be accessed and used as income each year. This is a great way to meet your living expenses as you scale back your work commitments or as a way to fund salary sacrificed super contributions and take advantage of tax savings.

For a long time, TTR pensions have been a favourite of financial advisors thanks to this combination of concessionally taxed income and tax free earnings on the balance of your pension. Although the latest reforms may mean that TTR pensions will be less effective for some, the majority of people will still find that it’s a great way to boost future wealth.

PAYING TAX ON YOUR TTR PENSION

Currently, TTR earnings are tax exempt but this is set to change from 1 July 2017 if the proposed legislation passes into law. These earnings will then be taxed in line with accumulation super accounts at the concessional rate of 15 per cent and will apply regardless of when your TTR pension commenced. As well as this tax increase, we may also see a reduction in the concessional contributions cap to $25,000 per year, limiting the amount of TTR income that can be salary sacrificed back into superannuation.

It’s important to understand that even with the loss of tax free earnings and reduction in the concessional contributions cap, the right TTR strategy can still significantly reduce the amount of tax you pay. This chart shows the tax benefits from a TTR strategy based on the annual salary for someone over 60.

You’ll notice that as salary increases, tax savings initially increase but then decline as superannuation guarantee contributions limit the amount that can be contributed within the cap. The spikes in savings are due to the salary sacrificing of income from a higher tax bracket. It’s easy to see from the chart that a TTR strategy is still a great way to save on tax.

A real-world view

To understand the benefits of a TTR pension for the average Australian – and how the proposed changes will work in the real world – it’s worth looking at a very simple and common example.

Susan’s 57 years old. She makes $80,000 a year and has $500,000 in her super account. She pays income tax on her salary and her fund pays $4,500 tax on her $30,000 earnings. Susan wants to cut back on work as she transitions into retirement so she reduces her working hours by 25 per cent and sees a similar reduction in her earnings – now down to $60,000. She can now access a TTR pension of $20,000 per year so she can maintain her lifestyle even as she works less.

Currently, Susan pays income tax but her fund pays nothing on the earnings from her TTR pension savings. Under the government's new changes, the earnings on Susan's pension assets will no longer be tax free – they’ll now be taxed concessionally at 15 per cent. Even with the changes, Susan still has more disposable income than if she didn’t have her TTR pension – ensuring she can maintain her lifestyle, even with reduced work hours. [1]

Your super is as important as ever.

Rules affecting transition to retirement and concessional contributions caps are set to change on 1 July 2017. If you do find the benefits of your TTR strategy have been reduced, a high performing super fund with cost effective financial advice is more important than ever before.

It’s also important to remember everyone's circumstances are different, so it’s best to talk to an expert. If you've been thinking about topping up your super or setting up a transition to retirement strategy, now’s a great time to discuss your plans and find out what the changes mean for you.

Call the VISSF Client Services Team on 1300 660 027 to discuss your super contributions or transition to retirement needs over the phone.

[1] BUDGET 2016, SUPERANNUATION FACT SHEET 12, Superannuation Reform: Improve integrity of transition to retirement income streams

This article is issued by VIS Nominees Pty Ltd(ABN 11 006 586 367, AFSL number 235097,RSE Licence number L0000321), the Trustee of The Victorian Independent Schools Superannuation Fund (ABN 37 024 873 660, RSE Registration number R1000436, MySuper Authorisation 37024873660599). The information provided in this article is general information only and does not take into account your personal financial situation or needs. You should consider obtaining advice that is tailored to suit your personal circumstances.

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