Transition to retirement pensions retain appeal
Not surprisingly, several readers with transition to retirement (TTR) superannuation pensions have asked how the budget changes will affect them. One reader even asked about ways for "the empire to strike back" and avoid the adverse impact of the proposed changes.
The government's plan is to remove the tax-free status of all income received by TTR funds from July 1, 2017. Unlike past super tax changes, this change is retrospective and applies to both existing and new TTR pensions.
Obviously, the government's intention is to reduce the attractions for older workers to access their superannuation by starting or operating a pension account while still working.
Despite the higher tax bill of 15 per cent tax on fund income and 10 per cent tax on longer-term capital gains, TTR pensions will still have attractions in several situations. These include gaining access to up to 10 per cent of a super account annually once the member has reached their preservation age, in most cases 60. After age 60, the annual TTR pension will remain tax-free under the proposed changes.
This will provide a strong incentive for people with credit card, mortgage and other debt to start or continue with a TTR after age 60. Below this age, the TTR pension will be taxable as at present and subject to a maximum tax rate at the relevant marginal rate less a 15 per cent tax rebate. In most cases, this will discourage starting or continuing a TTR pension before age 60.
Given that the minimum preservation age will shortly be 60, the question for older fund members is whether or not it's desirable to draw down their superannuation before reaching 65.
The answer for many, especially with the new age pension assets test to apply from January 1, 2017 is yes, particularly if there are debts to pay off or a desire to work shorter hours.
Another option is available to existing TTR pensioners adversely affected by the proposed changes. This is to change the preservation status of their superannuation by changing jobs after age 60 or by retiring from the work force (defined as working on average fewer than 10 hours a week). The resulting change in the existing super balance to an unrestricted unpreserved status allows the money to be withdrawn tax-free as a pension or lump sum.
At age 65, all superannuation attracts the unrestricted unpreserved status and commencing a pension on a balance of up to $1.6 million will generate a totally tax-free income under the new rules.
TTR pensions may also thus become attractive to people wanting to limit their account balances to this amount, for example, in order to build up their partner's super or other assets.