WHAT IS A TRANSITION TO RETIREMENT PENSION (TTRP)?
A TTRP is an income stream that can be accessed before retirement. Generally, an individual can only access their superannuation benefits when the following conditions are met:
1. The individual has reached preservation age (55 or over)
2. The individual is retired, or is over age 65.
With the TTR pension, an individual does not need to be retired to access the benefits offered by a retirement income stream. Importantly, once the second condition is met (being retired), the income stream automatically reverts to a normal allocated pension. A feature common to both allocated pensions and TTR pension is that no tax is charged on earnings.
THE MAIN BENEFITS OF IMPLEMENTING A TTR STRATEGY ARE:
1. Earnings tax paid inside of superannuation can be eliminated by rolling funds to a TTRP. This effectively adds 15% to the performance of your retirement savings each year.
2. Tax friendly income derived from the TTRP will allow you to salary sacrifice more into superannuation than you need to take out. Income derived from a TTRP is generally more tax effective then income received from working, especially after age 65. This can open up an ‘arbitrage situation’ where the amount needed to draw from the pension is much less than the amount needed to replace it via salary sacrifice.
3. The TTR strategy can result in lower taxable and assessable income. This can enhance the ability to qualify for tax offsets such as Mature Age Tax Offset (MATO) and Low Income Tax Offset (LITO). It may also increase your eligibility for the government’s co-contribution scheme.
ADVANTAGES OF IMPLEMENTING A TTR STRAGEGY
- No tax on earnings or growth within the TR Pension.
- Access to the 15% pension tax offset between ages 55 and 59 and tax-free income from age 60.
- The strategy can be completely unwound (i.e. funds rolled back to superannuation) without any negative implications on the retirement balance.
- The level of income received can be adjusted between minimum and maximum levels.
- This is a tax structure driven strategy. This means it is not reliant on strong market performances to make it a successful strategy.
DISADVANTAGES OF IMPLEMENTING A TTR STRATEGY
- If the income drawdown from the TTRP is not replaced, the final retirement balance may be less.
- Income from the TTR Pension may be received at different times to your current salary or self-employed income.
- There may be transaction costs involved in establishing the strategy.
- The amount contributed back to superannuation is limited by the Concessional Contribution Cap (CCC) amount.
Upon retirement, superannuation fund and Transition to Retirement Pension consolidate into standard Account Based Pension (no maximum limit on annual amount
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Superannuation and Borrowing summary
Bank funded borrowing arrangements
- The superannuation law contains a general prohibition against super funds borrowing. This general provision was modified in September 2007 to allow super funds to borrow under certain circumstances.
- Whilst the exemption comes under the heading ‘Instalment Warrants’, the rules themselves have much broader application. In essence, provided the arrangements meet five criteria, a super fund will be entitled to borrow. Those criteria are:
(a) The money borrowed is applied to acquire an asset, other than an asset which the fund trustee would otherwise be prohibited from acquiring;
(b) The asset is held on trust so that the fund trustee only has a beneficial interest in the asset;
(c) The fund trustee has a right to acquire legal ownership of the original asset by making one or more payments after acquiring the beneficial interest; and
(d) The asset held in the trust must be the only asset held by that trust.
- It is relevant to note that the arrangements will not permit a super fund to acquire an asset that it could not otherwise acquire. For example it could not acquire a residence or holiday property to be used by a member as this would breach the sole purpose test. It could not acquire an asset from a member or a relative of a member unless the asset was business real property or listed shares, as these acquisitions are otherwise prohibited.
- Additionally, an aspect of the new borrowing laws is that the legal title of the asset must be held in trust. Funder & Associates can assist clients in establishing these trusts, under what we call Super Borrowing Instalment Trusts (SBI Trusts). The trust must be in place before the contract to purchase the asset is signed, or you can end up paying extra costs such as double duty.
- Further, there is no prohibition against others providing security, whether over assets outside of the super fund or by way of personal guarantees. Accordingly, a member of the super fund could allow security to be given over their own personal assets, or give personal guarantees if the Loan to Value Ratio (LVR) otherwise became an issue.
- Other assets of the super fund can not be used as security.
- As discussed, the limited recourse funding arrangements with financiers that can be structured are illustrated by the two examples below.
- Bank funding – limited recourse secured over property and other personal assets
- In this example, the member of the super fund offers their personal assets or acts as a guarantor to provide additional security to the bank to secure the borrowing by the super fund.