The Transition to Retirement Double-Dip
Margaret is 58, still working full-time, and earns $140,000. She has $800,000 in super and wants to start a transition to retirement (TTR) income stream to 'salary sacrifice more and pay less tax'. Her adviser suggests she salary sacrifice $30,000 (on top of employer contributions of $17,500) and take $45,000 per year from the TTR pension. Margaret also has $200,000 in a separate accumulation account and a $300,000 mortgage at 6.2%. She asks whether the TTR earnings are taxed and whether the strategy improves her position.
1. Explain the tax treatment of the TTR pension and whether the proposed salary sacrifice fits the cap.
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A TTR income stream is taxed at 15% on earnings (not exempt) until the member turns 65 or meets a condition of release such as retirement. Payments are taxed at marginal rates with a 15% offset if from a taxed source, so Margaret's $45,000 is assessable but partly offset. Her concessional contributions would be $17,500 + $30,000 = $47,500, which exceeds the $30,000 cap by $17,500; the excess is taxed at her marginal rate with a 15% offset. She should cap salary sacrifice at $12,500 to stay within $30,000, or use the higher cap only if eligible (not at 58). The TTR strategy can still work: sacrifice within the cap and replace cash flow with TTR payments, but the tax benefit is reduced by the 15% earnings tax and the 15% contributions tax.
2. Quantify whether the strategy is better than paying down the mortgage.
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Salary sacrificing $12,500 saves roughly 47% − 15% = 32%, about $4,000 per year. The TTR pension of $45,000 is drawn from a fund earning taxed income; the net benefit depends on the fund's return. By contrast, $45,000 applied to a 6.2% mortgage saves about $2,790 in interest in year one, risk-free and tax-free. The TTR strategy also reduces the super balance and may incur fees. A fair comparison must include the 15% earnings tax on the TTR account (which reduces the fund's compounding), the loss of the tax exemption on earnings, and the mortgage's guaranteed return. For Margaret, a blended approach - sacrifice within the cap and direct surplus TTR payments to the mortgage - is likely superior to maximising the TTR drawdown.
3. What conditions of release and compliance issues should be checked before commencing the TTR?
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Margaret must have reached preservation age (57 for her cohort, so 58 qualifies) and be transitioning to retirement. The TTR must be a non-commutable income stream while she is still working, with a maximum of 10% of the account balance per year. She must confirm the fund permits TTR, that the minimum and maximum drawdown rules are met, and that the pension is not used to circumvent preservation. She should also check that her salary sacrifice arrangement is documented with her employer and that the fund has her tax file number. The adviser should document the strategy, the comparison with the mortgage, and the client's objectives in a statement of advice.