Transition to Retirement and aged-based limits

Q:

Q: I AM 56 and own a small marketing company, and at present I am salary sacrificing each year up to the age-based limit of $100,000. I am in the top tax bracket. I intend to wind back over the next few years and think it might be time to assess a Transition to Retirement (TTR) strategy. However, I have heard a TTR strategy is of little value when I am salary sacrificing up to my age-based limit. Do you agree with this or would I be better to wait until 60 to start a TTR?

Our expert David Sharpe CFP is a senior advisor at Momentum Planning Pty Ltd.

A: The benefits of a TTR strategy are twofold. Firstly, it may allow a person to make further deducted contributions to super and secondly, it converts your super account from accumulation (where you pay between 10% and 15% on the earnings) to pension (where the earnings are tax free). The first benefit doesn’t apply to you as you are already using your maximum contributions cap. The second benefit may still be applicable.

In commencing a TTR today, you would be required to drawdown a minimum of 4% of your portfolio balance each year, which will be added to your personal taxable income. In calculating whether a TTR is advantageous to you, you will need to work out the personal tax that would be payable on the pension drawdown and comparing this against the superannuation tax you are saving by converting to pension phase.

Up to the age of 60, the personal tax payable would be affected by a number of factors including the level of tax-free component within your existing super fund. The tax payable from age 60 would be $0 regardless.

In summary, a TTR can still be advantageous even if you are making the maximum deducted contributions already – you will just need to seek some advice that is appropriate to your individual circumstances.

David Sharpe, CFP, is a senior advisor with Momentum Planning Pty Ltd and can be contacted on 08 9221 1955 or via www.momentumplanning.com.au