How would you like an extra $300,000 to $1.3 million in your super at retirement?
For years now I’ve been giving seminars about how people can save thousands of dollars a year in income tax and boost their super by hundreds of thousands of dollars by implementing a transition to retirement income stream (TRIS) in their superannuation.
Unfortunately, superannuation’s constantly changing laws and regulations mean that many people render the establishment of a TRIS too hard because the super laws are simply too complex to understand. But it’s really not that difficult. You may simply need advice from a professional to show you the massive benefits and impact this extraordinary strategy can provide come retirement.
Why choose a TRIS?
At each seminar I estimate that only about 30 per cent of those people eligible would actually have a TRIS strategy in operation. The immediate opportunity exists in educating the populace about superannuation and making a big difference to your bottom line at retirement with little or no pain.
If you won $300,000 in the lottery, you’d remember it forever. But if I told you your super would be better off by $300,000 in 10 years by setting up a TRIS, it just wouldn’t carry the same excitement. The fact remains that a TRIS is available to just about everyone1 over 55 and under 65 who is still working (there are some exclusions such as those people in defined benefit funds).
How TRIS works
A TRIS allows you to salary sacrifice up to the maximum concessional contribution in super of $25,000 ($35,000 if you were 59 or over on June 30, 2013 and $35,000 next year for over 49s – this does change regularly!). At the same time, you can draw tax-effective money from your super to subsidise your income and thus retain your existing cash flow. The result is lots of gain and no pain because your super increases in value and your cash flow remains unchanged.
If you make a concessional contribution to super, like salary sacrifice (and including your superannuation guarantee amount of currently 9.25 per cent2 of your salary), you only pay 15 per cent3 superannuation tax and no income tax on that amount up to your maximum limit of $25,000 or $35,000 depending on your age. This boosts your super and reduces your tax.
For example if you earn $60,000, your marginal tax rate is 32.5 per cent, thus saving you more than 50 per cent on your tax bill for any additional contributions you make to super. If you earn $200,000, the saving could be as high as 68 per cent in tax and the impact is more significant.
The example I’ve been kicking around in my seminars investigates the benefits for a 55-year-old man earning $76,000 per annum with $300,000 in his super fund. If we maximise his contributions and commence a TRIS to subsidise his income, he will be better off by around $300,000 in retirement assuming a 0 per cent return on his money. If we assume around a 7 per cent return on super for the 10 years until retirement, we could at least double that figure to more than $600,000 better off or $30,000 a year in income better off in retirement.
For a higher-income-earning couple on more than $180,000 per annum each, they could be better off by at least $1.3m at retirement by maximising their contributions and investing at an average return of 7 per cent per annum over the 10-year period. This is huge step up in the final years prior to retirement.
The other major benefit of a TRIS is that your invested superannuation will be free from capital gains tax and earnings tax. If you’re already maximising your salary sacrifice then it may still be worth establishing a TRIS.
Still confused? You’re not alone. Superannuation’s constantly changing laws and regulations can exacerbate the confusion, and that’s why not enough people are doing it. To find out if a TRIS is right for you, seek advice from a professional licensed financial advisor or your accountant, or call your super fund.[Footnotes]
1. While most people will be eligible for a TRIS, they are not available to everyone. You should talk with your super fund provider and check your trust deed if you have a SMSF to ensure it has been updated to include the TRIS option.
2. Superannuation guarantee is paid by your employer if you earn over $450 per month.
3. People who earn over $300,000 may pay an additional 15 per cent contributions tax.
The tax related information contained in this is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice or tax advice. You should seek independent professional tax advice before making any decision based on this information.