TTR strategy ‘valid’ – even after Budget proposals

Bryan Ashenden

A TTR (transfer to retirement) strategy remained valid even if the 2016 Budget proposal to change its tax status became law, Bryan Ashenden, Head of Financial Literacy and Advocacy at BT Financial Group, told the 2016 SMSF Association Technical Conference.

Addressing the topic Pension strategies for the super savvy, he said it was proposed that from 1 July 2017 earnings on assets that support a TTR strategy would have the same tax treatment as funds in the accumulation phase, and as a consequence the value of TTRs was being questioned.

But Ashenden cautioned against speculation that suggested the worth of a TTR strategy was only valid if its tax benefits remained, and said this represented missed opportunities.

“Rather, consideration should be given to the many reasons why a TTR has been, and will remain, a valid option for many members as they reach their preservation age.” This includes:

• The ability to trade off taxable employment income with pension income that is taxed more favourably to an individual, with the benefit of increasing the amount that is accumulated in the super fund to help a member reach their retirement goals;
• The ability to allow a member to transition to retirement through a gradual or partial reduction in their employment hours and using the TTR to supplement income needs;
• The ability to access some accumulated superannuation savings to accelerate repayment of debts, such as a home loan, which will reduce expenses when the member fully retires.
  Ashenden said what needed to be remembered was that from a TTR perspective the only benefits lost were the tax exempt status of the pension earnings and the reduction in the concessional contribution cap.

Effectively, the consequences were:

• 15% of the taxable earnings on assets that support the TTR income stream; plus
• The difference between the member’s marginal tax payable on the (up to) $10,000 reduction in the concessional cap that would otherwise have been contributed to super and the 15% tax that would have been payable in the fund on that amount; less
• The amount of tax that the member would have paid on the TTR income drawn during the year that would be above the amount expected to be withdrawn post 1 July 2017.

“Applying the above formula will result in the loss of some amount of a benefit to the member, but it is unlikely that it will reduce the tangible benefit of a TTR strategy to nil.

“In fact, the only scenario where there may be cause to consider ceasing to utilise a TTR is where a member is drawing income that is surplus to their needs and would otherwise be recontributing that amount back to their super fund.”

Ashenden said it was imperative that SMSF specialists were cognisant to the proposed change to the TTR strategy, and they needed to ensure their trustee clients were across the issue.