This is the last article in our series on the super changes. Links to the other five notes are available at the end of this note
What is a Transition to Retirement (TtR) pension?
It’s a pension you can take if you are aged at least your “preservation age” – that is, aged at least 55 if born before July 1960 and aged at least 56 if born during the 60/61 financial year.
Before July 2017 it has been possible to:
- Continue to work full time or at least four days each week
- Salary sacrifice as much as possible into super
- Once aged at least 60, take a tax free pension from super where the pension income and capital gains were also tax free
- If you are aged between your preservation age and less than 60, then the income you receive from the Transition to Retirement pension is taxed at the normal marginal rate less a 15% tax offset
This has provided terrific incentives to many older Australians to continue working and save money towards their retirement.
A major adjustment announced in the Turnbull/Morrison 2016 super changes was to tax the earnings of these pensions at 15% and realised capital gains at effectively 10% from July 2017 onwards.
This additional tax essentially means that TtR pensions will provide marginal benefits at best for many people aged at least their preservation age but under 60 who are not paying at least the second highest marginal tax rate plus Medicare (that is, 39%) on at least one third of their income. I think you need taxable income of about $130,000 for TtRs to be worth your while in this age bracket after taking into account the additional costs you will incur to run these types of pensions. Anyone in these age brackets need to do some number crunching before automatically starting these pensions.
Given the tax free nature of income from super pensions, from age 60 onwards, it is probably the case that TtR pensions will continue to provide some tax concessions even for those with taxable income of at least $50,000.
But there is another important change that you need to consider that will also apply from 1 July 2017. Until you permanently retire or reach age 65 (whichever happens first), your pension will not be counted towards your Transfer Balance Cap (for details please see this article
). This means that until you satisfy either of these rules then you can have any amount of money in a pension. Once one of these rules is met, then the maximum you could have in a pension account is $1.6m.
Splitting super benefits with your spouse
There are two basic reasons to split your super money with your spouse:
- Equalise your super investments between you both
- Depending on your circumstances potentially have more money in tax free pensions
Equalising your super isn’t for everyone. For example you might want to leave your superannuation savings in your name for estate planning reasons.
And on the face of it, there may seem little after tax advantage of equalising your super. But the fact is that we never know what future tax changes will be like and to hedge against unfavourable increases it might be a good idea to have less money in one person’s name.
You might have $2.5m in super all in your name and very little or negligible amounts in your spouse’s name. This means you are limited to $1.6m in pensions in your name only with the rest taxed at 15%. Overtime, assuming contributions can be made for your spouse over about a decade, you could move $900,000 into your spouse’s name and then commence a pension.
There are two ways to split your super:
- Split concessional contributions with your spouse
- Take money out of your super account and contribute the proceeds in your spouse’s name
There are three issues from a super and tax law perspective that you need to take into account:
- Tax on benefits – if you’re aged over 60 then the benefits in your SMSF will be paid tax free; tax may apply if you’re aged at least your preservation age but under 60 when the benefit is paid (we do not discuss this issue in any detail here)
- Ability to make contributions – we have already discussed these broad rules – click here to see them
- Tax on contributions – this is where the contribution caps come into play; from 1 July 2017, the concessional contribution cap is $25,000 per annum for each person; the post June ’17 non-concessional contribution cap and the transitional rules that apply to it is discussed in the article we published here
To split contributions with your spouse you need complete a specific form – which you can find here (in pdf format).
In the preamble to the form, the ATO provides details on how to complete it, the maximum you can split with your spouse and also the deadline as to when it has to be sent to your super fund.