Tax exemption on TTR pension earnings removed – but TTRP strategy still useful
The tax exempt status of income from assets supporting transition to retirement (TTR) pensions will be removed from 1 July 2017, with earnings to be taxed at the Super accumulation tax rate on earnings of up to 15%. It is generally accepted that the tax-free earning environment added an additional 0.5% or so to the earning rate. This change will apply regardless of when the TTR income stream commenced. This is another case where current arrangements should have been “grandfathered” or exempted.
Further, TTR pension recipients will no longer be able to treat certain income stream payments as lump sums for tax purposes, which currently makes them tax-free up to the low rate cap of $195,000 – a tax-minimisation strategy used by those under 60.
There is no doubt that the reduction in the maximum concessional contribution cap to $25,000 pa and the removal of the tax-free environment for TTR pension earnings takes the shine off the use of the TTRP strategy. However, we believe it can still be a useful strategy for those over age 60 for the following reasons:
- The proposed changes don’t come in for another 13.5 months – and they will still have to run the gauntlet of the new Lower House and Senate, presuming team Turnbull is re-elected.
- The TTR pension payment is still tax-free and can help supplement contributions up to the full $25,000 cap, so that it is fully utilised.
The salary sacrifice strategy still provides a significant tax saving between the 15% contribution tax and the TTR recipient’s marginal tax rate from 1 July, 2017 (34.5%, 39% or 47%, including levies)
Implementation of the strategy imposes an important and sometimes necessary savings and budgeting discipline.
For these reasons, we can still see the Transition to Retirement Pension strategy still being a useful tool for many clients once they reach age 60 – however this will need to be decided
AD (Tony) Gillett FPA Fellow CDec