What is the 'Transition to Retirement' (TTR) Strategy?

The Australian Government has recently introduced legislation to allow pre-retirees (55+) access to a Non-Commutable Allocated Pension (NCAP). This effectively allows individuals to commence a pension, making use of superannuation benefits before retirement. The Government's intention for introducing this legislation is to prolong the time spent in the work force for those considering early retirement. The motivation behind this is to supplement income for those over 55 who would still like to work part-time.

As well as a means to supplement income, the TTR Strategy can also be used to take advantage of the favorable tax treatment afforded to retirement income streams. The recent legislation changes have made the TTR strategy even more attractive.

This strategy is not restricted to part time workers wanting to supplement their income via their superannuation benefits, as it can be used by any person over the age of 55. The basics of this strategy are to salary sacrifice as much as you can into superannuation and supplement this from drawings off the established NCAP. The TTR can also be used by self employed persons in a similar manner.

The main benefits of implementing a TTR strategy are:

1. Earnings tax paid inside of superannuation can be eliminated by rolling funds to an NCAP. This effectively adds 15% to the performance of your retirement savings each year.
2. Tax friendly income derived from the NCAP will allow you to salary sacrifice more into superannuation than you need to take out. Income derived from an NCAP is generally more tax effective then income received from working.

What is a Non Commutable Allocated Pension (NCAP)?

An NCAP is an income stream that can be accessed before retirement. A normal Allocated Pension can only be accessed when the following two 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 NCAP, 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 NCAPs is that no tax is charged on earnings.

The NCAP is a market linked income stream that can be rolled back to superannuation at any time, or rolled to an Allocated Pension once retirement is reached. The only restriction placed on an NCAP is that between 4% and 10% of the balance must be withdrawn on an annual basis as income. This income is tax effective (especially from age 60) and can be contributed back to superannuation if required.

Advantages of implementing a TTR Strategy

1. The amount rolled into an NCAP is not subject to the 15% earnings tax applied to superannuation.
2. The income drawdown from the NCAP may provide tax concessions up to age 59 and is tax free from age 60.
3. The strategy can be completely unwound (i.e. funds rolled back to superannuation) without any negative implications on the retirement balance.
4. The level of income received on a monthly or yearly basis is adjustable.
5. This is a tax structure driven strategy. This means it is not reliant on strong market performances to make it a successful strategy.

Contact your Meritum Adviser to find out more about Transition to Retirement Strategy.