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Pensions, Regulation, Strategy

TTR strategy holds up amid changes

Concessional contribution cap Stage three tax cuts Superannuation guarantee Transition-to-retirement pension TTR Colonial First State Tim Sanderson

The merits of implementing a transition-to-retirement income stream have not been dulled by recent changes to certain superannuation parameters.

Recent adjustments to superannuation and tax thresholds appear to have had minimal impact on the effectiveness of a common transition-to-retirement (TTR) pension strategy, according to a technical specialist.

Colonial First State senior technical manager Tim Sanderson highlighted the strategy of redirecting income, typically via salary sacrifice, that would otherwise be taxed at marginal rates into an accumulation account as concessional contributions is still a viable option, despite adjustments to the concessional contribution cap, superannuation guarantee (SG) rates and the stage three tax cuts.

Sanderson further explained this approach allows tax-free pension payments to replace lost net income, ensuring more net contributions are made each year than pension withdrawals.

“These things each can change the effectiveness of a TTR strategy, but [it] can still provide a significant benefit, even after these changes, while not losing any net income,” he noted during a FirstTech podcast recently.

“The increase in the basic concessional contribution cap by $2500 improves the effectiveness of the strategy because we’re able to convert more taxable income to concessional contributions where it makes sense for the client.

“The increase in the super guarantee rate means more concessional cap space is already used up for employees. That’s going to happen again next year when the SG finally hits 12 per cent.

“For the stage three tax cuts, it really depends. If the client’s marginal tax rate has gone down on 1 July 2024, then the TTR strategy will be less effective relatively because we’re not saving as much tax by making concessional contributions.”

To illustrate his point, he shared an example involving Jessica, a 60-year-old earning $120,000 annually.

Jessica starts a TTR pension using $190,000 of her super, makes concessional contributions up to her cap and draws pension payments to replace her lost income for five years until retirement at age 65.

“If we assume only last year’s tax, concessional cap and SG rates apply for the five-year period, Jessica has $2970 more in super after one year and about $17,220 after five years. She benefits by implementing that TTR strategy,” Sanderson said.

“If we use this year’s rates and caps instead, Jessica gets $2950 after one year and $17,080 after five years. As you can see, there is pretty much no difference. The high concessional cap is basically offsetting the increase in the super guarantee and the effect of the stage three tax cuts.”

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