In one of our earlier posts, we discussed some of the super strategies to think about in Changes to super rules - what this means for your SMSF’s cash. Peter Hogan, Head of Technical from the SMSF Association, has also gone in to some detail in his video on the superannuation reforms here.
Whilst some may be sad to see the removal of the earnings exemption on Transition to Retirement (TTR) pensions from 1 July 2017, we have compiled some ideas so that you can continue to maximise your superannuation savings as you near retirement.
Transition to Retirement (TTR) pension strategies
- Look for any opportunity that could change your TTR pension to a full Account Based pension and maintain the exemption on tax. You may not even be aware that you have already met a full condition of release or have failed to inform your super fund administrator, so consider if any of the most common full conditions of release listed below apply to you:
- reached your preservation age and retired from a job
- works up to 9 hours per week and has decided that they will never work 10 or more hours per week in the future
- has a permanent incapacity, terminal illness, etc.
- ceased any one employment arrangement on or after the age of 60
- is 65 years of age (even if they haven't retired)
Note the highlighted phrase 'any one' employment arrangement, as often people have a second job or have helped out in another business on a part time basis. For example, did you help supervise or mark HSC or Uni exams, work for the Electoral commission, or deliver Census forms? Leaving that position may have triggered a full condition of release already.
It may be worth considering ending that arrangement in order to trigger a full Condition of Release and keeping your funds in tax exempt phase after 1 July 2017.
- For example, a 63-year-old father who ran his son’s motel for 3 weeks while the family went on holiday received pay and some superannuation contributions. Because it was a one off position and it ended after age 60, he can move his account from TTR to a full Account Based pension and the earnings of the fund will remain tax free after 1 July 2017.
- For more details and some additional triggers see the ATO’s Conditions of release.
- 2. TTR pension payments remain tax free after age 60, so if you are able to reduce your personal tax by salary sacrificing and receive a tax free pension payment, then the strategy is still valuable to you.
Tip:Remember to review salary sacrifice arrangements to allow for the new cap of $25,000 on concessional (pre-tax) contributions from 1 July 2017 and check if your June 2016 Super Guarantee and Salary sacrifice contributions were delayed until after 1 July 2017.
- 3. Be careful when moving large sums of money. If you’re undecided about how to invest your funds, then park your contributions in lower risk investments such as cash, and invest when you have more time to think about it. Make sure to check if your account has an automatic investment facility so that you know where your money will be invested. As an example, in 2006/7 some people took advantage of the ability to put up to $1M in to super, but many accounts automatically invested this across a Growth or Balanced portfolio rather than in the cash option, which led to some finding themselves very exposed to shares and property when the market crashed. For more ideas, read our post, Treat your SMSF cash as an investment and diversify it.
- 4. If you're aged 55-59 and in a TTR pension via your SMSF, there is still one last opportunity to have the 2016-17 TTR pension payment treated as a lump sum for tax purposes to reduce your tax. Make sure to read this Heffron blog post for more detail and then speak to your administrator. Note that you are still subject to the maximum 10% pension payment from your balance.
Under the rule changes, from July 2017 you no longer have to meet the 10% rule or make salary sacrifice contributions via your employer to claim a deduction. You may decide to make your own contributions in June each year when you know how much you want to claim as a deduction (subject to the $25,000 cap). This helps people with multiple jobs to do some tax planning and offers a lot more flexibility to maximise contributions.
- 1. As TTR pensions will not count towards your $1.6M pension transfer limit, you can still use the re-contribution strategy. You can draw down up to 10% of your account balance each year and re-contribute these funds plus any savings as non-concessional contributions to boost the tax fee component of your fund. This is still important for tax planning and acts as a hedge against future government tax changes.
Tip:Think about re-contributing these for an eligible spouse if you need to even up balances to make the most use of the $1.6M pension transfer limit later.
2. You still have the opportunity to make further non-concessional and concessional contributions to Accumulation phase as long as you are under 65, or over 65 and meet the work test. See our post on How to make the most of your super contributions when you're in the Accumulation phase, but be aware of these limitations:
- Understand your caps and how much of it you have used before making further contributions.
- After age 65, you can no longer use the '3 year bring forward rule' even if you meet the work test. So non-concessional contributions will be limited to $100,000 per year from 1 July 2017. You can still use the '3 year bring forward rule' at age 64 without meeting the work test in the following two years.
- The proposed budget move to allow everyone aged 65-74 to make further contributions without meeting the work test did not make it in to the final legislation.
Capital Gains Tax (CGT) relief for Transition to Retirement pensions – To reset or not?The Capital Gains Tax relief provides a great opportunity for superannuation funds to reset the cost base of fund assets. If these assets were sold in this financial year, you can lock in any capital gains tax-free. As an example, this means that a property you bought for $250,000 some years ago and which is now worth $600,000, can have its cost base increased to $600,000 between now and 30 June 2017 so that CGT is limited to future gains above $600,000. However, while looking like a good option for everyone at first glance, there are some scenarios which require further thought:
- If you have assets that are currently in a loss position, you may not reset the cost base for that asset.
- If you would trigger a notional gain (some funds currently in accumulation) but are unlikely to sell an asset before you enter full account based pension phase, then you may be better not to elect for the reset.
Tip:Make sure you get personalised advice based on your fund and your future plans before making any CGT election.
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Disclaimer: The views expressed, and any advice given, in the above articles are those of the authors, and do not necessarily reflect the views of RaboDirect. We recommend that you seek professional advice before making any decisions relating to the matters discussed on this page and their related articles.