Transition to retirement strategy –
everything you need to know
Kim Guest: Senior Technical Manager - FirstTech
July 2014
firsttech@colonialfirststate.com.au
Disclaimer
This presentation is given by a representative of Colonial First State Investments Limited AFS Licence 232468, ABN 98 002 348 352 (Colonial
First State). Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) is the issuer of interests in
FirstChoice Personal Super, FirstChoice Wholesale Personal Super, FirstChoice Pension, FirstChoice Wholesale Pension and FirstChoice Employer
Super from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557 and interests in the Rollover & Superannuation Fund
and the Personal Pension Plan from the Colonial First State Rollover & Superannuation Fund ABN 88 854 638 840 and interests in the Colonial
First State Pooled Superannuation Trust ABN 51 982 884 624.
The presenter does not receive specific payments or commissions for any advice given in this presentation. The presenter, other employees and
directors of Colonial First State receive salaries, bonuses and other benefits from it. Colonial First State receives fees for investments in its
products. For further detail please read our Financial Services Guide (FSG) available at colonialfirststate.com.au or by contacting our Investor
Service Centre on 13 13 36.
All products are issued by Colonial First State Investments Limited. Product Disclosure Statements (PDSs) describing the products are available
from Colonial First State. The relevant PDS should be considered before making a decision about any product. Stocks referred to in this
presentation are not a recommendation of any securities.
The information is taken from sources which are believed to be accurate but Colonial First State accepts no liability of any kind to any person
who relies on the information contained in the presentation.
This presentation is for adviser training purposes only and must not be made available to any client.
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© Colonial First State Investments Limited 2014.
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What we’ll cover …
• How tax effective is TTR?
• TTR strategy Mythbusters
• Excess contributions
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Tax benefits of a TTR strategy
TTR strategy has two main benefits:
• Earnings Tax Benefit
•
No tax on earnings on assets supporting pension
+
• Personal Tax Benefit
•
•
•
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Tax saved by salary sacrifice increases this benefit
Tax paid on TTR pension payments reduces this benefit
Contributions tax and 15% pension offset also taken into account
Tax savings on TTR strategy for clients aged 55-59
Personal income tax benefits for salary vs TTR Income - $100 before tax income
Net $100
after tax
MTR (%)
Gross TTR
Income
0.00
100.00
100
21.00
79.00
84.04
34.50
65.50
39.00
47.00
Net tax
on TTR
Net TTR
Income
Total Tax
Payable
Effective
Tax Savings*
100.00
15.00
5.04
79.00
15.00
20.04
0.96
81.37
15.87
65.50
15.00
30.87
3.63
61.00
80.26
19.26
61.00
15.00
34.26
4.74
53.00
77.94
24.94
53.00
15.00
39.94
7.06
This is ignoring the earnings tax benefit
*5Tax savings reflected in higher super account balance
-15.00
Cont Tax
payable
0
0
Tax savings on TTR strategy for clients aged 60 or over
Personal income tax benefits for salary vs TTR Income - $100 before tax income
MTR (%)
Net $100
after tax
Gross TTR
Income
Net tax
on TTR
Net TTR
Income
Cont Tax
payable
Total Tax
Payable
Effective
Tax Savings*
21.00
79.00
79.00
0
79.00
15.00
15.00
6.00
34.50
65.50
65.50
0
65.50
15.00
15.00
19.50
39.00
61.00
61.00
0
61.00
15.00
15.00
24.00
47.00
53.00
53.00
0
53.00
15.00
15.00
32.00
This is ignoring the earnings tax benefit
*6Tax savings reflected in higher super account balance
How tax effective is a TTR strategy?
• Jane earns $60,000 salary and has a super balance of $200,000
• Justin earns $80,000 salary and has a super balance of $350,000
• Jasmine earns $100,000 salary and has a super balance of $500,000
Let’s look at TTR strategies, specifically:
• Impact of $35,000 CC from last July assuming clients are aged 60…
• Impact of $35,000 CC from this July assuming clients are aged 55…
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Clients aged 55, benefit of TTR for one year
$4,500
$4,146
$4,000
$3,601
$3,773
$3,500
$3,000
$2,500
$2,625
$2,156
$2,156
$2,000
$1,500
$1,000
Sal.$60,000
Sal.$80,000
Sal.$100,000
$500
$0
Jane
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Justin
$25,000 concessional cap
$35,000 concessional cap
Jasmine
Clients aged 60, benefit of TTR for one year
$10,000
$9,051
$9,000
$8,000
$7,450
$7,000
$6,701
$6,468
$6,000
$5,000
$4,257
$4,257
$4,000
$3,000
$2,000
Sal.$60,000
Sal.$80,000
Sal.$100,000
$1,000
$0
Jane
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Justin
$25,000 concessional cap
$35,000 concessional cap
Jasmine
Long term impact of a TTR strategy- Judy case study
55 years old, works full time and has no
plans to change employers
Income $50,000 gross pa ($41,453 pa net)
Judy
$300,000 accumulated in super
Aims to retire at 65
Objective: Judy wants to keep working and at the same time increase
her retirement savings in super
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Long term impact of TTR strategy- Judy case study
Without a TTR
strategy
Using a TTR strategy
$50,000
$50,000
Salary sacrifice
n/a
($14,813)
Pension payment
n/a
$12,000
Tax paid
($8,547)
($5,735)
After-tax income
$41,453
$41,453
$495,416
$540,850
$24,770
$27,040
Salary
At age 65
Retirement balance
Minimum pension
Assumptions: earning 7.7% pa after fees and before taxes with inflation at 3%; using 2014-15 income tax rates; minimum pension is paid as
an allocated pension; superannuation guarantee contributions are 9.50% of gross salary before any salary sacrifice in year 1, rising gradually to
12% in year 7; all superannuation contributions and pension payments are made regularly throughout the year. This also assumes the low
income tax offset applies. A change to any of the assumptions and variables can provide significantly different results.
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1. This applies whilst the TTR is in existence.
Transition to Retirement strategy
Myth 1
When a TTR pension commences part way through the year, the
10% maximum pension drawdown must be pro-rata based on
the number of days remaining in the financial year.
There’s no requirement to pro-rata the 10% maximum pension
payment if the pension’s commenced part way through the year.
i.e. TTR pension commenced on 1 March 2014 for $500,000 the
member can withdraw $50,000 before 30 June 2014.
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Myth 2
Under no circumstances can lump sum commutations be taken
from a transition to retirement pension .
Unrestricted Non-Preserved can be accessed if trustees are able
to keep track of it. However, be mindful that pension payments
are deemed to come out of the URNP component first.
Some super funds preserve all benefits
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Myth 3
TTR strategy is not worthwhile if earn less than $37,000 pa
Case study:
Ron is aged 55 and has approximately $250,000 in
superannuation (all taxable component). He works part
time and has a salary of $25,000 pa while his wife Lucy
earns $70,000 pa. Ron plans to retire in 5 years time.
Should Ron implement a TTR strategy, draw the minimum
payment and direct any surplus income to his
superannuation account as a non-concessional
contribution?
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Ron
Myth 3: TTR strategy worthwhile if earning less than $37,000?
Retirement savings
balance
$320,000
Year 3
$4,811
$300,000
Year 2
$3,122
$280,000
Year 1
$1,520
$260,000
no ttr
Year 5
$8,472
$240,000
$220,000
Year 4
$6,592
$200,000
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Age
1 Assumptions: amounts shown in today’s dollars; income and realised gains of 4.63% and capital growth of
2.31%; franking percentage of 22.2%. Tax rates and thresholds for 2014/15 financial year; includes
government co-contribution;
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59
ttr
Myth 4
When implementing a TTR strategy a client should always convert
100% of their super balance to a TTR pension.
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For clients over 60 – yes move it all to pension phase!
Case study: Betty
• Aged 60 and working full time, earning $150,000 pa
• Concessional cap $35,000, SG $13,875,
– $21,125 remaining for salary sacrifice under TTR strategy
• Current super balance $600,000
$150,000 TTR
$300,000 TTR
$450,000 TTR
$600,000 TTR
Min TTR pension
$6,000
$12,000
$18,000
$24,000
Salary sacrifice
$9,756
$19,512
$21,125
$21,125
Non-concessional
-
-
$5,008
$11,008
Net contribution
$8,293
$16,585
$22,964
$28,964
Personal Tax Benefit
$2,293
$4,585
$4,964
$4,964
Earnings Tax Benefit*
$900
$1,800
$2,700
$3,600
Total benefit of TTR
strategy
$3,193
$6,385
$7,664
$8,564
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Assumes 4% pa income, taxed at 15% in accumulation phase or tax free in pension phase
For clients between preservation age and 59, not so easy!
Case study: Chris
• Aged 55 and working full time, earning $150,000 pa
• Concessional cap $35,000, SG $13,875,
– $21,125 remaining for salary sacrifice under TTR strategy
• Current super balance $600,000
$150,000 TTR
$300,000 TTR
$450,000 TTR
$600,000
Min TTR pension
$6,000
$12,000
$18,000
$24,000
Salary sacrifice
$7,475
$14,951
$21,125
$21,125
Non-concessional
-
-
$794
$5,354
Net contribution
$6,354
$12,708
$18,750
$23,310
Personal Tax Benefit
$354
$708
Earnings Tax Benefit*
$900
Total benefit of TTR
strategy
$1,254
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$750
- $690
$1,800
$2,700
$3,600
$2,508
$3,450
$2,910
*
Assumes 4% pa income, taxed at 15% in accumulation phase or tax free in pension phase
Clients 55 to 59, how personal tax benefit changes…
Tax saved from salary
sacrifice
Concessional cap
Extra tax on pension
payments
Personal Tax Benefit is maximised when minimum pension
payment is only just enough to allow a client to use their
concessional cap.
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Chris’s Personal Tax Benefit peaks when TTR is $425,000
$4,000
$3,500
$3,000
$2,500
But won’t the increasing
Earnings Tax Benefit
more than make up for
this reducing benefit?
$2,000
$1,500
$1,000
$500
$0
-$500
-$1,000
$600,000
Chris's Personal Tax Benefit
$500,000
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$400,000
$300,000
$200,000
$100,000
$0
TTR pension starting balance
Earnings tax benefit v Personal Tax Benefit
Effect of increasing TTR starting pension balance by $25*
MTR
Personal Tax Benefit
lost
Earnings tax benefit
gained
Outcome
21%
6 cents
15 cents
9 cents better off
34.5%
19.5 cents
15 cents
4.5 cents worse off
39%
24 cents
15 cents
9 cents worse off
47%
32 cents
15 cents
17 cents worse off
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* 2014-15 MTRs including 2% Medicare levy, 100% taxable component, earning rate is 8% pa consisting of half
income and half unrealised gain
Chris’s optimum TTR is where Personal Tax Benefit peaks
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
-$500
-$1,000
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Chris's Earnings Tax Beneift
Chris's Personal Tax Benefit
Total benefit of TTR
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
TTR pension starting balance
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Salary
$35,000 concessional cap
$250,000
$240,000
$230,000
$220,000
$210,000
$200,000
$190,000
$180,000
$170,000
$160,000
$150,000
$140,000
$130,000
$120,000
$110,000
$100,000
$90,000
$80,000
$70,000
$60,000
$50,000
$40,000
$30,000
Ideal maximum TTR starting balance
Optimum TTR balance for employee clients aged 55 to 59
$800,000
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
Myth 5
It is not worthwhile for people earning over $300,000 to implement
a TTR strategy.
Background:
From 1 July 2012 clients who earn over $300,000 will pay an
additional 15% tax on any non-excessive concessional
contributions.
• Clients earning over $300,000 likely to have already maxed out
their CC cap
• Clients aged 55-60: benefit of a TTR strategy is likely to be
marginal
• Clients aged 60 or over: still worthwhile because of savings on
earnings tax in pension phase
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TTR strategy summary
• Extending $35,000 cap to clients age 55-59:
– existing 55-59 yo clients may need existing TTR strategy adjustments
• Clients aged 60 or over, always best to use as much super as possible
to commence TTR
– Some exceptions, eg, already maximising NCC, in untaxed fund, etc.
• Clients aged 55 to 59, a maximum optimum balance will apply
– Make most use of concessional contribution cap unless on low income
– Salary sacrifice so that taxable income is no less than $20,542
– If the client’s super balance is substantial and the minimum pension balance
exceeds the income requirement, then consider optimum pension balance
– Refreshing to optimum balance each year may maximise benefit
– Also recommence with 100% of super balance at age 60
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Excess contributions
Excess concessional contribution tax changes
• Substantial changes to old system
• Excess CCs included in assessable income – taxed at marginal rate
plus excess contributions tax charge
• Entitled to tax rebate of 15% of excess concessional contributions
• applies regardless of effective tax rate on contributions
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Excess concessional contribution tax changes
• Can elect to have up to 85% of excess contributions released
• Must apply to ATO within 21 days of receiving excess notice
• Once made election irrevocable
• Payment to ATO who will then pay member (net of any outstanding
liabilities)
• Payment is non-assessable non-exempt income
• Proportioning rules don’t apply
• Reduces non-concessional contributions (amount x 0.85)
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Case Study
• Jessie (age 50) has assessable income of $100,000 in 2013-14 year
• In the same year her concessional contributions totalled $35,000
($10,000 excess)
• Tax on excess concessional contributions calculated as follows:
• amended assessable income = $110,000
• additional tax liability: $10,000 x 38.5% = $3,850
• less 15% of excess CCs: $3,850 – ($10,000 x 15%) = $2,350
• could elect to have up to $8,500 released
• What if fund neutrally geared?
• same result (15% rebate based on amount of excess CCs)
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Excess concessional contribution tax changes
• Should clients release their excess contributions?
• do they need the money
• do they have an excess non-concessional tax liability?
• could pull out and put back in as non-concessional
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Excess concessional contribution tax changes
• Additional charges apply to adjust for timing difference
• excess contributions charge
• shortfall interest charge
• Excess contributions charge
• payable on the amount of an individual’s income tax liability
attributable to the taxpayer’s excess concessional contributions in a
year
• applies from first day of the year to which the contributions relate
to day before tax is payable under first assessment
• 90 day bank accepted bill rate + 3% (currently 5.69%)
• not deductible expense
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Excess concessional contribution tax changes
• Shortfall interest charge
• payable on difference between original tax liability and amended
assessment taking into account excess concessional contributions
• applies from time original tax liability due until time additional
liability paid
• same rate as excess contributions tax charge (currently 5.69%)
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Excess concessional contributions tax changes
Example
Assuming same details for Jessie (tax on excess CCs of $2,350)
1 July 2013
30 June
2014
Lodges tax
return
31 August
2014
21 September
2014
Tax assessment
for 2013-14
issued
Total tax liability on excess contributions = $2,547
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Commonwealth Bank of Australia / Presentation Title / Confidential
30 November 21 December
2014
2014
Amended assessment
for 2013-14 issued
Additional
tax paid
Thank You
FirstTech team: 13 18 36
Email: firsttech@colonialfirststate.com.au