TAX incentives for pre-retirees have been watered down dramatically this year but there’s still a chance to grab extra cash and other financial benefits.
Lucrative transition to retirement pensions, which allowed people aged over 56 to slash their tax while boosting their nest egg, took a hit in the July 1 superannuation changes when the government made their earnings taxable just like regular super.
Super specialists say this has wiped thousands of dollars of potential financial benefits off TTR pensions.
However, super remains the lowest-tax place to park your retirement savings and the TTR pensions can still pack a punch — particularly for over-60s.
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The initial benefit of TTR pensions — to allow people to withdraw some of their super while cutting their work hours in later years — remains. What has largely stopped is the popular financial strategy of salary sacrificing as much as possible into super to save tax, then withdrawing the funds needed from a tax-free TTR pension.
Calculations by Colonial First State show a 56-year-old with $250,000 in super and a $60,000 salary would have been $11,000 better off over four years from a TTR strategy under the old rules, but that benefit is now just $4000.
Colonial First State head of technical services Craig Day said the news was better for the same person aged 60, whose $26,000 four-year benefit would only reduce to $19,000.
He said payments from TTR pensions remained tax-free despite the rule changes.
“The changes on the first of July did put a bit of a cloud over transition to retirement strategies and whether people should continue to use them, but they’re still there and still may be very useful,” he said.
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They could be used by pre-retirees to top up income, reduce working hours and cover their lower wages with super savings or pay down a home loan faster, Mr Day said. And they still could combine TTR pensions with salary sacrifice to boost super nest eggs, he said.
“A lot of the advisers still recognise the benefits of TTR and are considering them for their clients.”
Wealth for Life Financial Planning principal Rex Whitford said the July changes hit higher income earners the hardest, which was what the government wanted.
“The greatest benefit was that earnings inside the pension were tax free — now they’re not,” he said.
“In some cases there’s still a benefit, albeit significantly reduced.”
Mr Whitford said seeking advice about TTR pensions was more important because the complexity had increased. He said even smart, educated law professionals had “no idea” how the new rules worked. “If they don’t know what’s going on, what’s the average punter’s idea?”