Money Australia — May 2017

SUPER COUNTDOWNINVESTING

TTR pension:

costvbenefit

T

ransition to retirement pensions (TTRPs)

aren’t limited by the $1.6 million pension

transfer cap but from July 1 they are facing

aseparatechange.Inbrief,therewillnow

betwotypesoftaxesthatwillapplytonewandexisting

TTRPs,regardlessofthebalance.Sohere’swhatyou

need to consider if you set one up, or are assessing if

youshouldkeepyourexistingaccount going.

Two types of tax

TTRPscanpayoutbetween4%and10%ofthebalance

eachyear.Fortunately,thetaxonpaymentscomingout

oftheaccountwon’tchangeafterJuly1.Ifyouare60or

over, payments are tax free and for those 56-59 the tax

remainsthesameasinpreviousyears–15%lessthan

your personal marginal rate, sometimes even lower.

It’s the tax rate inside the TTRP that’s changing. At

first,itmightnotbeclearhowthischangeimpacts

you,solet’sbreakitdown.FromJuly1a15%taxrate

willapplytoincome(interest,dividends)and10%to

capitalgains(forinvestmentsheldforatleast12months)

generated inside a pension. These are the same tax

rates that apply in accumulation accounts, which makes

calculating the cost-benefit payoff of starting a TTRP

versuskeepingyourmoneyintheaccumulationphase

until full retirement much tougher.

If you’re not sure if you should keep or start a TTRP,

check the comparison in the table.

Tax-free cash flow

If you’re 60 or over, after July 1 there will be no tax

difference between a TTRP and holding super in an

accumulation account. But this type of pension gives

youaccesstoatax-freecashflowthatmaybevery

valuable for reducing debts or helping you to gradually

reduce your work hours.

Formanypre-retireesunder60,startingthistypeof

pensionwillnowincreasetheirtaxburden,compared

with holding money in accumulation phase. If you’re

inthisagebracket,startingonemayonlybeappro-

priatewheretheneedforcashflowisveryhighdue

to mortgage pressure, job loss, private school fees or

unexpected expenses. However, for low income earners

and those who have built their super from non-conces-

STORY

NERIDA COLE

sional contributions, this type of pension may still be

taxeffective,asthepaymentsarelikelytoattractvery

littletax,evenifyouareunder60.

Ifyou’reacoupleandoneofyouhasalargesuper

balance,theannualpensionpaymentcouldhelpyou

re-allocate some of your balance to your spouse’s super.

This will be more important in the new super regime,

as couples are more likely to optimise the amount they

hold tax free in retirement if super is evenly held.

If you’ve reviewed the options and you don’t need

thecashfloworthere’snostrategicreasontokeep

your TTR income stream running, you may need to

consider rolling it back to an accumulation account.

Butit’sadvisableformostfundtypesnottostopthe

account until after July 1, if retaining eligibility for

capitalgainstaxreliefisbeneficial.Mostbiggersuper

funds are expected to provide information packs to

members with TTR income streams.

Before June 30 there are some last-minute tasks to

getyourfinancesincheckbeforethenewrulestake

effect. Next month we’ll cover these, as well as end-of-

financial-year strategies.M

With tax about to change, it may be time to roll back your account

Nerida Cole is Dixon Advisory’s managing director –

head of advice.

TTR PENSION TAXES

AGE TAX TYPE BEFORE

JULY 1

AFTER

JULY 1

56-59

Personal tax payable^1

Marginal

rate less

15%

Marginal

rate less

15%

Maximum tax payable on

earnings within TTR

account^2

$0 15%

60+

Personal tax payable^1 $0 0%

Maximum tax payable

on earnings within TTR

account^2

$0 15%

(^1) Assumes the TTR is made up only from superannuation guarantee, concessional
contributions and earnings. Actual tax rate could be lower.^2 15% tax applies to income
and 10% to capital gains if investment held for at least 12 months.