Super changes / Transition to Retirement and Catch Up Concessional Cap

Q: I have been reading about the changes to the transition to retirement strategy. I will turn age 60 in August 2022. I am earning $110,000 per annum and I am concerned about how this changes will impact me?

A:  The effectiveness of the Transition to Retirement (TTR) Strategy has been continually watered down over the past 10 years due to the reduction in the concessional contribution cap and abolition of the tax-free investment earnings contained within the TTR pension from 1 July 2017.

From 1 July 2017, the investment earnings contained within the TTR pension will be subject to a maximum tax of 15%. This is a significant change from the nil tax on earnings at present.  This means the tax effectiveness of the strategy reduces further.

The taxation treatment of the pension payment from the TTR pension will remain unchanged. However, for people under age 60, the tax effectiveness of the strategy to boost their retirement savings whilst working full time will be significantly reduced.  This is due to the imposition of the tax rate of 15% on the investment earnings within the TTR pension.

In a recent blog, we outlined the impact of the changes to the concessional contribution cap reducing to $25,000 per annum from 1 July 2017 regardless of age (refer to a recent Blog – click here).

It’s not all bad news since you are turning age 60 in August 2022. You might be able to take advantage of the “Catch up concessional contribution cap” (CUCC) coming into effect from 1 July 2018.   The CUCC could apply if you have a Total Superannuation Balance of less than $500,000 on 30 June of the previous financial year you may be entitled to contribute more than the concessional contributions cap of $25,000 and make additional concessional contributions for any unused amounts. Some of the key facts include:

  • The first year you will be entitled to carry forward unused amounts is the 2019/20 financial year.
  • Unused amounts are available for a maximum of 5 years, and after this period will expire.
  • The 2019/20 financial year will be the first year you can make additional concessional contributions for any unused amounts.

For example: If you do not salary sacrifice into superannuation, the amount of your unused concessional contribution cap would be $14,500 (ie $25,000 – $10,450) for 2018/2019 financial year. The unused amount can be carried forward each financial year and at 1 July 2022, it would amount to $58,200. During the 2022/23 financial year, your total concessional contribution cap would be $83,200 (ie $58,200 plus $25,000).

Start of Financial Year Financial Year Concessional Contribution Cap^ (A) Employer Contribution* (B) Unused Concessional Contribution Cap = (A) – (B) Total CUCC at end of Financial Year
1/07/2018 2018/2019 $25,000 $10,450 $14,550 $14,550
1/07/2019 2019/2020 $25,000 $10,450 $14,550 $29,100
1/07/2020 2020/2021 $25,000 $10,450 $14,550 $43,650
1/07/2021 2021/2022 $25,000 $10,450 $14,550 $58,200
1/07/2022 2022/2023 $25,000 $10,450

 

^ Assumes no indexation of the cap.
* Based on $110,000 salary and assumes no change in the rate of employer superannuation guarantee contributions.

The maximum amount of your pre-tax salary sacrifice contribution could be as much as $68,650 (ie (Total CUCC of $58,200 plus $25,000) = $83,200 less $10,450 employer contribution for the 2022/2023 financial year). This means with the tax-free pension payment from the Transition to Retirement would be $43,551[1].

As demonstrated in the following table, by using the Total CUCC of $58,200 during the 2022/2023 financial year, you can increase your net contributions into superannuation by $14,801 (ie. $27,169 – $12,368) and reduce your total tax paid by $14,802 (ie. $32,715 to $17,913 including tax on super contributions).

  No TTR TTR
  Strategy & No CUCC Strategy & CUCC
Income    
Salary (Excludes SG Contribution) 110,000 110,000
Salary Sacrifice Contributions 0 68,650
Taxable Salary 110,000 41,350
     
Total Income (Taxable Salary + Pension) 110,000 41,350
Income Tax & Medicare 30,532 5,433
     
Net Income 79,468 35,917
Tax-free pension payment 0 43,551*
Net Income Required 79,468 79,468
     
Contributions    
Salary Sacrifice Contributions 0 68,650
Super Guarantee Contributions 14,550 14,550
Contributions Tax 2,183 12,480
Net Contributions 12,368 70,720
Less Pension Income Drawn 0 43,551
Net into Super 12,368 27,169
   
Total Tax    
Income Tax & Medicare 30,532 5,433
Contributions Tax** 2,183 12,480
Total 32,715 17,913

 

^ Based on 2017 financial year tax scales
* Assumes a superannuation balance above $435,510 as the maximum pension payment is 10% of the account balance and pension payments received after age 60 being tax-free.
** Assumes contribution tax rate of 15% and all contributions are within the contribution cap.

So what is next?

The superannuation changes can deliver some positive outcomes for your retirement planning. With a number of complex changes coming into effect from 1 July 2017 you should seek advice from a qualified financial adviser to ensure you work towards achieving your retirement goals and maximising

Article written by Damian Hearn, WealthPartners Specialist Adviser


[1] Assumes a superannuation balance above $435,510 as the maximum pension payment is 10% of the account balance and pension payments received after age 60 being tax-free.

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