Nick Bruining: Transition to retirement strategy offers chance to tap into super but still keep working

It’s a common strategy championed by financial advisers — commence an account-based pension while still working and use the cash flow to top up your superannuation or pay off debts. Called transition to retirement, the tax calculations stack up for most and the strategy could see you completely debt-free, sooner than you thought. The concept of tapping into your super early this way dates back to the John Howard era of politics when youth unemployment was sky-high. The theory was that older Australians could reduce their hours to make room for younger employees and top up their reduced income with payments from super. To be able to commence a TTR, you need to have reached preservation age which is now 60. At the time TTR was introduced, 55-year-olds could access their super this way. Sixty is coincidentally, and fortunately, the age where withdrawals from most taxed superannuation funds are completely tax-free. A taxed super fund covers almost all super funds with a few notable exceptions. Both State and Federal government employees who joined the public service before certain dates will be members of untaxed funds which have added complications. Often, they’ll require you to completely close the account if you want to set up a TTR arrangement. In WA, untaxed funds include GESB’s GoldState and WestState, but not GESB Super which is a taxed scheme. Under the TTR strategy, you can roll your entire super balance into a TTR account-based pension fund. In a practical sense, you would leave a small amount in the accumulation fund so that future contributions have somewhere to go. Once in the ABP, you need to be aware of certain rules that are unique to a TTR set-up. Firstly, investment earnings within the fund will still be taxed at 15 per cent, which is the same rate as superannuation money in accumulation phase. Next, you are required take out the minimum aged-based amount, but the maximum amount you can access is 10 per cent of the account balance. For example, a 60-year-old who transfers $500,000 into a TTR fund must take out at least 4 per cent of the starting balance, which is pro-rata if you start the strategy mid-financial year. From there on, it is 4 per cent of the June 30 balance until you reach 65, when it increases to 5 per cent. Importantly from whenever it starts, you can access the 10 per cent amount, or up to $50,000. And because you must be aged over 60, that $50,000 is tax-free. You could dump that straight into your home loan and save yourself more than 6 per cent on the interest cost you are paying on the mortgage. If you are lucky enough to be debt-free, you can also consider a strategy where tax-free regular payments from the TTR cover some or all of your living expenses. That then means a large chunk of your salary can be redirected to superannuation. The simplest way is to do it through salary sacrifice, where you ask your employer to redirect some of your pay into superannuation before your income tax is calculated. Because salary-sacrificed payments are concessional contributions to super, the fund will need to pay 15 per cent contributions tax on your behalf. But 15 per cent is much better than, say, the 32 per cent income tax and Medicare levy you would have paid if you had received that same money in the hand. Also be aware of the annual concessional contribution cap of $30,000 a year, which includes your employer’s 11.5 per cent compulsory super, your salary-sacrificed payments and any tax-deductible personal lump sum contributions you make. Once you satisfy a normal condition of release, that same TTR fund can become a conventional ABP fund. If you cease “gainful employment since reaching 60”, you can advise your ABP fund. From that point, there is no tax on the earnings and the 10 per cent maximum withdrawal restriction is removed. While all this looks and sounds simple, be aware of fees and charges that could impact the overall viability of restructuring your super this way. For example, if you end up paying $10,000 in fees for advice and set-up costs, that could swamp a $7000 saving in tax. Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association