How to get a 0% tax rate on super sooner?

Savvy investors can use a Transition-to-Retirement account to increase retirement savings and save on tax. 

There was an article written by Graham Hand last year about the amount of people that do not take advantage of the super pension. He quotes a Class Benchmark Report put out by SMSF administrator Class. It states that while only 12% of SMSF members aged 65 and over remained entirely in accumulation, half of APRA fund members over 65 had not switched any of their super to pension. The amount not switched to pension by over 65s is estimated at $225 billion.

Superannuation allows your investments to exist in two of the most favourable tax rates in our system – at 15% and 0%. Many investors would be stoked with a 15% return, but that is the effective rate that half of APRA members over 65 are missing out on.

Make sure that you’re minimising the tax that you’re paying within super based on your circumstances.

The three main types of superannuation accounts

Transition-to-Retirement

You’re able to start a ‘Transition-to-Retirement’ once you reach preservation age. Preservation age depend on when you were born. Most people have a preservation age of 60.

TTR strategies have two purposes from an investment perspective – it allows you to save on tax while increasing your superannuation savings with the tax windfall. This seems counterintuitive at first – you’re pulling money from your super, so how are you saving more for retirement? The proceeds from your super increases your cashflow, allowing you to increase your salary sacrifice from your working salary.

Using your Transition-to-Retirement to reduce hours

The first case for TTR was to maximise your superannuation balance. The other use for Transition to Retirement is to work less as you ease into retirement.
Life isn’t just about saving. If you’ve gotten to your preservation age and you’re on track to reach your retirement goals, you’re able to draw down on the maximum 10% as illustrated in the table. It means that you can pull back on your hours, and still bring home the same amount of money.

A few factors to consider

If you do take part in a TTR strategy you must keep your accumulation account open. This is the account that is able to accept contributions from outside of superannuation.

It makes intuitive sense, but it is worth noting that if you start a TTR, you may be pulling down on super earlier than you normally would’ve. This means that if you’re simply replacing the funds that are in there, you’re not growing your superannuation in those last few years of your working life. This may result in less retirement savings.

Many investors want to transfer as much as they can into a 0% tax rate environment. There are two main considerations here. The first is that you keep a minimum account balance in your accumulation account. The second is that you maintain that minimum account balance – you will need a buffer for any flat administration fees that are incurred with your account, for potential negative performance, and for insurances.

A TTR is income. If you are on any government benefits that have an income test, it may impact the benefits that you receive.

Life after a TTR

Once you reach 65 or have passed your preservation age and retire fully, you’re able to open an account-based pension account. The income that you have depends on how much you transfer to this tax-free account from your accumulation account (taxed at 15%). Currently, the limit is $1.9 million into a tax-free environment.

There are minimum withdrawals on this account, starting at 4%.

Determining the ideal rates for making contributions and withdrawals can be a complicated process. Humble Goode Financial is where you can go for help. Call us on (08) 7477 8252.

Original Source: https://www.morningstar.com.au/insights/retirement/246658/how-to-get-a-0-tax-rate-on-super-sooner

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