Making the most of Transition to Retirement (TTR) Strategy
Grant Chapman, Principal and Director of the Integrated Financial Solutions group, is responsible for your ongoing technical and strategic direction. He has over fifteen years experience providing technical and strategic advice to high net wealth and business clients on a broad range of super, tax, investment, insurance and social security issues.
Transition To Retirement (TTR) was initially introduced by the Government in July 2005 as a means of encouraging prolonged workforce participation and helping those aged 55 and over, to boost their retirement savings.
Through this strategy, those nearing retirement could reduce their hours and supplement a lower wage with a pension income from their super, while continuing to accumulate wealth. But six years on and despite the number of benefits of a traditional TTR strategy, we still see clients not taking full advantage of this last opportunity to accumulate wealth prior to retirement. This is surprising, given that there are 1.7 million Australians eligible to access a TTR (that is, aged between 55 and 65 and still working).
This strategy opportunity may apply to you
Australians aged between 50 and 65 hold about half the total vested super benefits in Australia. In APRA’s latest Annual Superannuation Bulletin, it was reported that those aged 50 to 59 now hold just over $303 million in super and those aged 60 to 65 hold close to $169 million in super. So out of the $1.012 trillion in Australian super benefits, the 50 to 65 age group hold a total of close to $472 million or 47 per cent.
The benefits of a TTR strategy are significant. According to the Australian Bureau of Statistics, of those aged 55 to 59, over 1 million (71 per cent) are still in the labour force. Of those aged 60 to 64 over 650,000 (51 per cent) are still in the labour force. These numbers alone demonstrate that there are a number of people that may not realise that they may receive significant financial benefits over time by accessing this strategy.
Making a TTR strategy work for you
While there are a number of benefits to a traditional TTR strategy, the fact remains that leading up to retirement, a TTR strategy requires you to draw down from your retirement savings to maintain your current level of income. Something you may not have considered a good option.
A TTR strategy works best over time, so the trick is to get in early to start the benefits. The earlier you start after turning age 55, the more time you have to boost your retirement savings through regular contributions and paying less tax.
It’s also important that you understand that you don’t need to reduce your working hours to use this strategy to improve your net position, as the Government never applied a work test to TTR. In fact, by implementing an optimised TTR strategy, you can generate more significant earnings while you maintain full employment. Let’s take a look at what an optimal TTR strategy looks like.
Three steps to implementing an optimal TTR strategy
- Determine optimal pension drawdown
The first step is to work out the level of pension and super contributions (concessional or non-concessional) that maintain you’re your current net income level, as well as giving you the highest increase in total benefits (super plus pension).
- Refresh the TTR pension each year
This involves commuting both the super fund and the TTR pension at the end of each financial year and rolling them into a new TTR pension. You cannot add to an existing pension but you can commute and rollover to a new pension. This has the impact of increasing the level of pension benefits receiving tax-free earnings and also increases the level of pension income that can be drawn down. Integrated Financial Solutions takes care of this process for you as part of the project management of the strategies implemented for you.
- Reduce annual net income requirement
If it is appropriate for you to implementing a strategy to reduce your net income during the transition to retirement period, can add significant value to you total benefits at retirement. The tax saved from this strategy increases your retirement savings. The Government and the ATO encourage this strategy as part of the raft of incentives aimed at reducing the retirement savings shortfall that relating to number of “baby boomers” moving into retirement over the next 20 years.
Take John (aged 55) for example, who works full time, earns $100,000 per annum and has a super balance of $400,000. Implementing a TTR strategy with a 10 per cent pension drawdown is beneficial and provides a $55,255 (or 6.54 per cent) increase in total benefits. This can be improved however, by determining the optimal pension drawdown, which delivers a $97,646 (or 11.56 per cent) increase in total benefits. Then, by implementing a ‘Pension Refresh’ each year, the optimal pension drawdown strategy will be enhanced by a further $17,828 (or 2.11 per cent) over the ten year period to age 65. Finally, by reducing John’s net income by only $3,300 per annum (indexed by 3 per cent per annum), his benefits will be increased to $1,001,827 (an increase of $41,419 or 4.9 per cent from the Pension Refresh step). The total impact of these three steps is an increase of $156,893 (or 18.57 per cent) over ten years.
|
John |
No TTR Strategy |
TTR Strategy 10 per cent pension drawdown |
TTR Strategy Optimal pension drawdown |
Optimal strategy with pension refresh |
Optimal strategy with net income reduction |
|
Total Salary Income |
$100,000 |
$100,000 |
$100,000 |
$100,000 |
$100,000 |
|
Total Net Income |
$73,300 |
$73,300 |
$73,300 |
$73,300 |
$70,000 |
|
Super Benefits |
$844,934 |
$617,020 |
$442,078 |
$61,406 |
$64,008 |
|
Pension Benefits – age 65 |
$NIL |
$283,169 |
$500,502 |
$899,002 |
$937,819 |
|
Total Benefits |
$844,934 |
$900,189 |
$942,580 |
$960,408 |
$1,001,827 |
|
Increase in Total Super $ |
N/A |
$55,255 |
$97,646 |
$115,474 |
$156,893 |
|
Increase in Total Super % |
N/A |
6.54% |
11.56% |
13.67% |
18.57% |
Assumptions used in projections:
- 8 per cent return net of fees and tax
- Indexation of 3 per cent per annum
- All relevant super and tax legislation including concessional contribution caps has been applied to calculations.
Using the Fintech Private Portfolios Australian Share Fund
There are significant benefits in utilising the Fintech Private Portfolios Australian Share Fund for your TTR strategy – both in the accumulation and pension phases. These benefits include:
- Regular income
The Fintech Private Portfolios Australian Share Fund distributes around 4-6 per cent of yield each year on average, so liquidity is available for pension payments, which prevents the premature disposal of other illiquid assets within pension phase. Income distributed after age 60 will be tax-free and where excess income exists, this can be reinvested into the Fund and treated as earnings which will also be tax-free within the pension. - Equity exposure and Tax Benefits
During the pension phase, clients will typically move into more conservative assets. The Fintech Private Portfolios Australian Share Fund provides exposure to blue chip Australian shares with the taxation benefits of Australian franking credit system. Excess franking credits are refunded to clients including superannuation and pension phase clients. This means up to 30% of Australian shares dividends paid, are also refunded to tax free pension clients in their tax returns as a bonus.
