Transition to retirement strategy

In the recent Federal Budget, the Government confirmed that concessional contribution caps will be fixed at $25,000 pa for the next two financial years, that is the amount that you can contribute into superannuation. This cap will apply to everyone including those aged 50 or over with a super balance less than $500,000. This will adversely affect many clients who are implementing a transition to retirement (TTR) strategy, as one of the main benefits of a TTR strategy is achieved through the tax savings gained by swapping salary or other income for concessional super contributions (the other main benefit being the tax exemption on earnings while in the pension phase of super). The reduced concessional contributions cap will limit the amount of salary sacrifice a client can make, significantly curtailing the net tax savings gained under the strategy for some clients. It is recommended that any clients who currently have a transition to retirement strategy in place review their plan.

However, if we leave aside the reduction in the concessional contributions cap and looking purely at the impact of the changes to marginal tax rates and thresholds from 1 July 2012, the good news is that the TTR strategy will continue to be tax effective for many clients, with minimal or no changes to the personal tax benefits of this strategy. Our analysis suggests that clients at certain income levels will actually be slightly better off from 1 July 2012 when all changes in marginal tax rates, LITO, low income Government superannuation contribution and reduction in co-contribution are taken into consideration.

In addition, the increased tax benefit of a TTR strategy that arrived once a client reaches age 60 (with all pension payments from taxed super funds being non-assessable non-exempt income) continues unchanged in 2012–13.

Contributions to super

Contributing to your super can be one of the most tax-effective ways of building your retirement savings. However, you need to be extra careful not to exceed your 

concessional contributions cap and incur excess tax. The government limits how much you can contribute to super in any one year. The annual contributions caps are:

·         $25,000 per year for pre-tax contributions (concessional) if you are under age 50 on the last day of the financial year.

          If you’re aged 50 or over on the last day of the financial year, a transitional cap of $50,000 per financial year applies until 30 June 2012 – commencing in the financial year you turn 50.

·         $150,000 per year for after-tax contributions (non-concessional) or $450,000 over a three-year period if you are under 65 in the financial year the contributions are made.

If you are over 55 years of age and are looking to establish a transition to retirement strategy, click here to contact us.