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Forward Thinking Magazine : April 2011
4 Macquarie Adviser Services Supplementing income in partial retirement : In some cases a TTR pension serves the purpose of supplementing a client’s work income because they otherwise wouldn’t have enough to live on, particularly in situations where they have reduced their hours of work and therefore their take-home pay. Typically the client is not salary sacrificing, but in some cases they might be hoping to increase their work hours and remuneration in future, in which case there may be a prospect of them resuming salary sacrifice contributions (and possibly even discontinuing the pension). If you have clients in this category, you may want to keep abreast of developments in relation to the concessional contribution (CC) cap for clients aged 50 or more. This is due to be reduced to $25,000 from 1 July 2012, in line with the cap for younger clients. However, the Government announced in May 2010 that from 1 July 2012, it will allow those aged 50 or more with total superannuation balances below $500,000 to make up to $50,000 of concessional contributions (CCs) annually without incurring a liability for excess CCs tax. In working out how this $500,000 “means test” will be administered, one possible option explored in the consultation paper released by Treasury in February this year is that clients who have less than $500,000 total super balances (as well as those with $500,000 or more) will be disqualified from the higher cap if they have received a superannuation benefit. If this option is taken up by the Government, TTR pensioners might be disqualified from the higher cap. (This is conceivably the case even if their balances had never reached $500,000!) However, it is quite possible that benefits taken before a certain date will be ignored. If so, clients who want to qualify for a higher CC cap in future may be able to qualify for it by switching off the pension before that date. Bear in mind, however, that the details of the proposal are not yet law, so it is far from clear that clients will have that choice. Indeed, two other options canvassed in the Treasury paper were to allow clients who have withdrawn benefits to be eligible for the higher cap but: ■ count withdrawn benefits towards the threshold (a recurrence of an RBL-like administrative nightmare?); ■ not count withdrawn benefits towards the threshold (administratively easier but a perceived advantage to those who have taken or will take benefits particularly if, as discussed below, a re-contribution strategy is being employed). In any event, it will be important to stay up to date with developments to ensure that clients have time to react to options that might arise. Boosting salary sacrifice contributions: In many cases the TTR pension can be useful for a client who remains in full-time work. Here it can simply serve the purpose of enabling them to salary sacrifice more of their remuneration package into super, with the TTR pension income replacing the salary income they would have received if they didn’t salary sacrifice. Here the person’s current lifestyle and cashflow can remain the same and in effect the super pension withdrawals can fund super contributions. While this seems somewhat circular, you’re no doubt familiar with the fact that it can be extremely tax effective and produce higher super savings overall when the client ultimately retires. Naturally, if a client is disqualified from the higher CC cap from 1 July 2012, the scope for this strategy will be limited to $25,000 of concessional contributions p.a . As discussed above in relation to clients who work part-time, it will be worth watching developments on the $500,000 threshold for those within reach of it. Boosting non-concessional contributions: A TTR pension strategy can also be useful for the full-time worker who is already salary sacrificing enough to fully use up their CC cap and doesn’t need extra pension income for that purpose. Given the proposed reduction in the CC cap from 1 July 2012, we will see significantly more of these clients in future. For these clients sometimes TTR pensions are a useful way to fund non-concessional contributions (NCCs) into superannuation and, although these contributions aren’t tax deductible to the contributor, in some circumstances this can be an effective way to build a greater retirement benefit provided the NCCs are within the relevant NCC cap. This approach may also produce estate planning benefits, as we’ve discussed in previous articles. Broadly, amounts equal to the TTR net after-tax pension payments are ultimately contributed into superannuation as non-excessive NCCs. Essentially, for this strategy to work, the tax payable on the pension payments needs to be less than the tax savings on fund income tax arising from moving the relevant accumulation amount into pension phase. (Of course, the tax liability on a pension payment from a taxed super fund to a client that has attained age 60 will be nil.) Note that this simple analysis ignores any tax savings arising from any potential change in the make-up of the tax free and taxable components of the relevant account. Common TTR pension uses MAStech