Inspirational Case Studies

Not just for the wealthy...

Since 1 July 2005, the transition to retirement condition of release has existed to allow those who have reached age 55 and are still working, access to their superannuation as a non‐commutable pension - that is, it cannot be cashed as a lump sum.

The transition to retirement condition of release was initially seen as a means of supplementing a reduced salary or self‐employed income for those winding down work hours in the final years to retirement. However, there are significant tax benefits in maintaining full employment, drawing a tax‐effective pension from your superannuation and contributing excess taxable income back to superannuation.

There is no work‐test needed to be satisfied to access a transition to retirement pension. This means an eligible person could work any number of hours, on any basis, in any week - without affecting their right to access the pension. Furthermore, there is no restriction on the amount of super benefits that can be used to commence the transition to retirement pension.

What are the tax benefits of implementing Seagrim's TTR strategy?

The main tax benefits of implementing Seagrim's TTR strategy using Reasonable Basis are as follows:

1. Earnings within super are taxed at up to 15%, but earnings and capital gains in the pension environment are tax‐free ‐ The reduction in super attracting earnings has a significant impact on final retirement savings. As an example, a person with $300,000 in super earning a gross return of 10% could pay up to $4,500 p.a. in earnings tax ($300,000*10%*15%). Compounded over ten years this could reduce their final balance by over $50,000 at retirement at age 65.   
2. TTRP income drawn from 55 to 59 is eligible for the 15% pension and annuity tax offset applies to pension income and from age 60 any income drawn from the pension becomes tax‐free ‐ This can open up an "arbitrage situation" whereby the TTRP income drawn from the retirement savings is significantly less than the amount contributed back via salary sacrifice or self‐employed contributions. 
3. Drawing tax‐effective TTRP income as opposed to taxable salary or business income means less assessable income is required to meet current net income levels ‐ this could mean the eligible person falls into a lower marginal tax rate. Also, excess salary or business income contributed back to super is taxed at a maximum of 15% (up to contribution deduction limits) - opposed to individual marginal tax rates (of up to 46.5%); and 
4. Enhanced ability to qualify for additional tax offsets - The strategy reduces the amount of income generated from working as a result of increased deductible contributions (e.g. salary sacrifice or self‐employed contributions). This means that eligibility for tax offsets such as the mature age tax offset or low income tax offset increases - because they are based on a person's level of net income from working (and not other assessable income - such as pension income).

What other opportunities exist in implementing Seagrim's TTR strategy?

Other opportunities the transition to retirement condition of release offers include:

1. Reducing desired net income level enhances benefits exponentially - If the investor is willing to reduce their current net income level when implementing Seagrim's transition to retirement strategy they will significantly increase retirement benefits. For example, a person earning $75,000 (or $56,025 net income) with $200,000 in super was willing to reduce their desired net income level to $52,000 ($1,000 per week) the increase in superannuation benefits they could expect at age 65 would rise from $80,275 to $125,393;
    
2. Pension Refresh - This involves commuting both the TTR Pension and Superannuation balances at the end of each year and rolling them over to commence a new pension. This has the effect of moving all superannuation benefits into the pension phase where any earnings are tax‐free (compared to 15% in superannuation phase). It also means the TTR Pension balance is higher enabling a greater level of concessionally taxed or tax‐free pension income (from age 60) to be drawn out of the pension which means there will be less reliance on taxable salary or self‐employed income.
    
3. Providing the self‐employed with a consistent income stream - Drawing pension income allows the self‐employed to smooth out fluctuating annual income and provides a certain and pre‐determined level of cash‐flow. This is especially useful for farmers and other workers in industries whose income levels fluctuate significantly from year to year;
    
4. Combining the TTR strategy with contribution splitting between spouses ‐ allows the utilisation of the tax‐free pension environment sooner, minimisation of combined income tax liability during the accumulation phase, and the sheltering of assets to increase the Age pension benefits;
    
5. Prolong workforce participation - The ability to reduce work hours in the period leading up to retirement and supplementing that reduced salary or business income with tax‐effective pension income allows current lifestyle to be maintained and could potentially prolong working life; and
    
6. Access to additional cash flow - This may be to renovate the family home, pay for child education expenses, or to make additional personal contributions that qualify for the Government co‐contribution.