Saving Thousands in Tax and Interest

By utilizing the transition to retirement properly, you can potentially save thousands in tax and interest on your loans.

Using Super to Reduce Debt

In simple terms, individuals with a mortgage or other debts can start using their super to reduce debt, even while still working.

Understanding the Transition to Retirement Income Stream (TRIS)

A Transition to Retirement Income Stream (TRIS) is a hybrid Account Based Pension (ABP) fund that falls between the accumulation phase and retirement phase of superannuation.

Account Based Pensions: Key Features

Account based pensions allow you to withdraw a percentage of the fund's balance each financial year.

For individuals under 65, the minimum withdrawal amount is 4 percent of the June 30 account balance or the starting balance if the pension commences after July 1.

The unique aspect of a TRIS is that the maximum withdrawal amount is 10 percent of the balance. Once you retire, this restriction is removed, allowing you to access as much as you need.

Differentiating TRIS and Conventional ABPs

Unlike a conventional ABP, a TRIS taxes earnings within the fund at 15 percent. In contrast, a "proper" retirement phase ABP does not impose any tax on earnings. But we'll explain shortly why it could still be worthwhile to use the TRIS.

Pro-rata Draw-down for Mid-Year Commencement

If you commence the TRIS or any ABP after July 1, the percentage draw-down is pro-rata. Starting in January, halfway through the financial year, would limit the maximum amount accessible from the TRIS to 5 percent. Thus, initiating the strategy earlier in the year is more advantageous.

Availability and Preservation Age

The transition to retirement strategy is only available once you reach the superannuation preservation age, which is now 59.

Partial or Full Transfer to TRIS

You have the option to move all or a portion of your super into the TRIS. It is advisable to keep the accumulation fund open with a small amount to allow for future contributions.

Timing Considerations: Tax and Income

Commencing a TRIS at 59 results in taxable income, subject to various tax offsets to reduce the overall tax effect, these can be complicated though. Waiting until your 60th birthday is often more favorable. After turning 60, payments from the TRIS become entirely tax-free.

Save on interest: Flexible payment options

With a conventional ABP, you typically set up monthly or fortnightly payments according to your cash flow needs. However, there's nothing preventing you from taking the entire 10 percent payment as a single annual payment.

By doing so, you can quickly pay off a significant portion of your mortgage, saving a year's worth of interest - which could be a huge win given the current mortgage

Capitalising on Concessional Contribution Caps

If you are debt-free or have surplus cash each pay day, you can leverage the concessional contribution caps by utilizing salary sacrifice. An unapplied concessional contribution cap rule allows the use of previous years' unused caps.

Calculating Concessional Contributions

The annual concessional contribution cap for each year is $27,500. This amount increased from $25,000 in 2018 to $27,500 last year. By carrying over unused caps, you effectively have two years at $25,000, last year's $27,500, and this year and next year's $27,500 each.

In total, you have an impressive $132,500 over five years.

Adjusting for Existing Contributions

To calculate the amount available for contributions, subtract contributions already madeand included in the total. This includes personal contributions with claimed tax deductions, employer contributions under compulsory arrangements, and pre-existing salary-sacrificed amounts.

Example Scenario and Strategy

Once you are over 60, any payments form the TRIS are completely tax free.

With a conventional ABP, you would normally set it up to make monthly or fortnightly payments to line up with your cashflow needs.

However, there’s nothing to stop you taking out the entire 10 per cent payment as a single annual payment.

If you go down this path, you could have your transition to retirement ABP set up and the 10 per cent out and off your mortgage in a matter of days.

That’s an entire year’s worth of interest saved on the amount you pay off your loans. Next July 1, you do the same thing again and whack another 10 per cent payment off your debts until hopefully they’re all cleared.

With interest rates rising almost monthly, getting rid of the dead money paid to your bank in the form of non tax-deductible interest payments makes perfect sense.

If you are lucky enough to be debt free or have spare cash each pay day that’s looking for a home, there’s a way of pumping tens of thousands into super over the next 12 months, using salary sacrifice.

It’s all tied to a rule that allows you to use unapplied concessional contribution caps from previous years.

Each year, we have an annual concessional contribution cap of $27,500. When the cap scheme started in 2018, the limit was $25,000 a year but it rose by $2,500 to $27,500 last financial year. From July 1, and using the unused rollover rule, your limit is effectively two years at $25,000, last year’s $27,500 and this year and next financial year at $27,500 each.

That gives you a grand total of an impressive $132,500 over the five years. Off this total, you need to subtract what has already been paid in.

That includes personal contributions where you claimed a tax deduction, any amount the boss paid or will pay under compulsory arrangements and pre-existing salary-sacrificed amounts.

As an example, we’ll say your grand total of these amounts works out to be $52,000, leaving you $80,500 unused.

And here’s the neat trick. As long as your total super account balance is less than $500,000, you could pay this in as a lump sum and claim a tax deduction — or better still, arrange to salary sacrifice an impressive $3100 a fortnight into super.

Total super balance is the grand-total of all money in the super system in your name, including accumulation and pension funds.

Perhaps that’s the money you’re no longer paying to your bank as a mortgage payment.

Remember that this amount is subject to a minimum contributions tax of 15 per cent but it’s more than likely to be much less than your personal marginal tax rate.

Conclusion

Transition to retirement offers an effective way for seniors to save on taxes, reduce debts, and optimize their super contributions. By understanding the features, rules, and timing considerations, you can make informed decisions to improve your financial situation.