We all know the old adage, if it seems too good to be true it probably is! This is almost always the case; however in financial planning we have an exception, the transition to retirement income swap strategy.
The transition to retirement income swap strategy is an extremely popular and powerful pre-retirement strategy that involves using superannuation to swap fully taxable income with tax-free income.
Unlike most strategies that we employ, where it is necessary to forego something to obtain a benefit, the TTR is all gain with no draw back.
So how does it work? Well about a decade ago the government introduced legislation that allowed pre-retirees to access up to 10 per cent of their superannuation balance whilst they continued to work.
The theory behind this was that it enabled them to transition into retirement by reducing work hours and supplementing their reduced income with money from superannuation.
In order to access these funds, money is transferred from superannuation to a non-commutable allocated pension, these are now also known as transition to retirement pensions. For those over 60, the income received from the TTR Pension is tax-free.
This legislation also provided an opportunity for what is known as the income swap strategy. Those who continue to work full-time can also access up to 10 per cent of their superannuation, this results in a cash flow surplus.
If this cash flow surplus is salary sacrificed into superannuation, there will be no income tax payable on these funds, and instead only contributions tax will be payable. Assuming the client’s marginal tax rate is higher than 15 per cent, this will result in a significant tax saving.
In the above scenario, the net income remains unchanged; however we have reduced the income tax payable by swapping taxable income for non-taxable income.
The tax savings accumulate within superannuation increasing the end balance at retirement.
It still amuses me how often clients ask if it is legal, which I understand, it does seem too good to be true!
Once you reach 60, if you are continuing to work, it really is advisable to speak to a financial advisor in relation to transition to retirement, for most people it is likely to increase retirement savings significantly.
Alex McKenzie, Future Financial Services
Alex McKenzie is a financial planner, and the owner of Future Final Services in Penrith. He is a graduate of Western Sydney University.