Transition to Retirement Pension Tax Trap

Prior to 1st July 2017, transition to retirement superannuation pensions commonly known as TTR pensions, did not attract tax on fund earnings.

However, from July 1st 2017, the fund earnings were taxed at 15% in the same manner as accumulation superannuation.

Unless the pension provider is informed, usually by a Statutory Declaration, that the recipient had retired, that tax will continue to be deducted until they reached age 65. 

Retirement does not necessarily mean that that the pension recipient stops working completely, but they need to be able to declare that, if they are still employed, that they are working less than 10 hours per week,  with no intention of seeking further employment.

I’ve come across a couple of cases in the past week where there was a TTR pension in place while they were employed, however they took retirement before age 65 but had not taken the step of informing the fund.

The tax deducted by the fund in those circumstances can be significant and I’m sure most people would agree that it’s OK to pay the tax that is due, but it doesn’t sit comfortably paying tax that should not apply.

Timing Retirement

A common question that is posed to taxation agents or advisers, is what date they should they retire.

The question often relates to minimizing tax on long service leave or accrued leave by finishing up in a new financial year.

For others with limited retirement assets, eligibility for the age pension can have a bearing on the retirement date.

Age Requirements

Period within which a person was born Pension age
From 1 July 1952 to 31 December 1953 65 years and 6 months
From 1 January 1954 to 30 June 1955 66 years
From 1 July 1955 to 31 December 1956 66 years and 6 months
From 1 January 1957 onwards 67 years

What is not often realised, that once a person reaches age 65, despite being employed full time, they can access superannuation, even though the Centrelink age pension is now creeping towards age 67.

Accessing superannuation while still employed at age 65, can be a significant retirement strategy.

Cashing in part of the superannuation, then recontributing up to the concessional cap of $25,000 to claim a tax deduction can be beneficial but this also enables the withdrawn amount to be re-contributed up to the non- concessional cap, as un-deducted. 

I have written about this in the past but utilising this strategy can potentially save thousands of dollars that might otherwise apply in death benefit tax, should the final superannuation beneficiary be a non- financial dependent, such as adult children. 

It is wise to contribute this amount to a separate fund, to separate taxable from non-taxable components.

There has been a lot written about the cost of duplicate superannuation funds which might be true when there are member fees or duplicate default insurance.

Those costs do not always apply, so duplicate superannuation does not always mean more costs.

Regardless, the benefit of separating taxable from non-taxable components in a second fund can be worth it as a retirement strategy. 

Alan Tickle. 

Your Heritage. 

This information is of a general nature only and should not be relied upon without first seeking individual advice from a financial adviser or taxation professional. 

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