1 RETIREMENT Home Insurance Get on the TTR track How to transition to retirement tax-effectively
2 Everyone s idea of the perfect retirement lifestyle is different. But whatever your goals, you want to make the transition to retirement on your own terms. A transition to retirement (TTR) pension allows you to access some of your superannuation while you re still working. This opens up a range of possibilities to boost your income, your lifestyle and even your super in the countdown to retirement. If you ve reached preservation age (55 60, depending on your date of birth) and still working, you re eligible to join the TTR track. And with the help of your financial adviser, the first step starts here. ANZ Wealth is a specialist division of ANZ that delivers a range of insurance, superannuation and investment solutions through award-winning brands, including OnePath. We believe quality financial advice is crucial to helping Australians achieve their life goals. Our range of wealth solutions is designed to support your advice strategies making it easier for you to find the solution that best suits your clients needs. ANZ operates in 33 markets globally with representation in Australia, New Zealand, Asia Pacific, Europe, America and the Middle East. ANZ provides products and services to more than 8 million retail customers worldwide and employs over 47,000 people. About OnePath At ANZ we value and appreciate our financial adviser partnerships, customers and the communities OnePath Australia offers a complete range of financial products and services. OneAnswer we operate in. We are committed to acting with the highest standards and to meeting our corporate and responsibilities. PortfolioOne ANZ allow has a strong you to involvement easily diversify in the your community, clients leading investment, the way across with programs a range of funds. targeting OneCare financial offers literacy, an indigenous innovative inclusion, life risk the range environment, to suit your volunteering clients insurance and sponsorship. needs, and our Integra Super and Corporate Super solutions are consistently ranked as one of the best ANZ actively participates in forums looking at regulatory and industry change. We also regularly review employer super products and conduct research to ensure we are attuned to changing adviser, customer and market needs. in the marketplace. OnePath Group is a global financial services company providing banking, investments, life insurance and retirement services to more than 85 million customers in 50 countries around the world.
3 What is transition to retirement? Transition to retirement rules allow working Australians who have reached their preservation age (55 60, depending on your date of birth) access to their superannuation while they are still working. This means that if you are approaching retirement you could reduce your work hours, and supplement your reduced employment income with income from your super. However, there is no requirement to actually reduce your working hours to start a TTR pension. This opens the door on some other tax-effective strategies, even if you re still working full-time. What are the strategies? 1. Lifestyle Booster Reduce your work, not your income A TTR pension can help you reduce your working hours while maintaining the same income. And because some of your income is coming from the TTR pension, you can manage tax payable on your income more effectively. 2. Super Booster Grow your super tax effectively It may sound hard to believe, but drawing a TTR pension while you re still working full-time can actually help you boost your super savings, without reducing your after-tax income. 3. Income Booster Top-up your income using super If you have sufficient retirement savings, you can use a transition to retirement pension while you are working full-time to boost your income today. The increased income can be put to work to reduce your debt, or fund projects such as home improvements. The key rules TTR pensions can only be started by people who have reached superannuation preservation age (55 60, depending on your date of birth). Must be set up using superannuation money. Pension payments capped at a maximum of 10% p.a. usually until the earlier of retirement or attaining age 65. Lump sum withdrawals are generally not allowed. Same taxation and social security implications as standard account-based pensions. 3
4 How do the benefits work? There are two key advantages associated with setting up a TTR pension: 1. You can reduce the tax you pay on your income TTR strategies often involve contributing part of your before-tax income into super. When you do this, you generally pay 15% tax on your contributions (up to certain limits)*. This compares to your marginal tax rate if you took this money as cash, which may be as high as 49%. Often the income you draw from a TTR pension is more tax-effective than your regular income. How much more effective depends on your age: 2. You can effectively manage the tax you pay on your investment earnings When you invest inside super, you generally only pay 15% tax on investment earnings compared to your marginal tax rate of up to 49% if you were investing outside super. After you turn your super account into a pension account, all related investment earnings are generally exempt from tax within the super fund. Information contained in this brochure relates to taxed super schemes. * Additional 15% tax may apply if your assessed income is over $300,000. If you re less than 60 years of age, part of the income you receive from super is taxed at your marginal tax rate. However you generally receive a 15% tax offset in your income tax return each year. After age 60, the income you receive from super is generally tax-free. 4
5 Know your limits If your TTR strategy involves making additional before-tax super contributions, you need to be aware of your concessional contributions cap as you may be penalised if you exceed this limit. In 2015/16, the concessional contributions cap is $30,000 and $35,000 for people aged at least 50 by 30 June This cap includes your employer s Superannuation Guarantee contributions, any salary sacrifice into super, or any personal super contributions. 5
6 Case study 1 Lifestyle Booster Janet, aged 58, is a retail assistant receiving a salary of $50,000 p.a. She has a fully preserved super account balance of $240,000 invested in a balanced investment option that has historically earned 5% p.a. (70% taxable component and 30% tax-free component) and plans to fully retire from the workforce at age 65. Her daughter has recently given birth to her first child and Janet is looking to reduce her work hours so she can help care for her grandchild when her daughter returns to work. Janet hopes to continue working three days a week, earning $30,000 p.a. However, she is concerned about meeting her living expenses if she reduces her working hours. After accounting for taxes and Medicare levy, her annual disposable income is $41,453. The strategy By commencing a TTR pension, Janet can still receive the equivalent take-home income as when she worked full time, despite reducing her work hours. Currently Janet s after-tax income is $41,453 on her $50,000 annual salary. Using a TTR strategy that supplements Janet s reduced salary of $30,000 with a TTR pension payment amount of $15,006 p.a., she can still maintain the same disposable income. It is important to be aware that drawing down superannuation benefits to supplement income can result in less superannuation in retirement. This is something that Janet must consider when deciding to reduce her work hours. Janet s income overview year one Current position ($) With TTR strategy ($) Salary 50,000 30,000 TTR pension (taxable) 0 10,504 TTR pension (tax free) 0 4,502 Total income 50,000 45,006 Gross PAYG tax (7,797) (4,711) Low income tax offset % pension tax offset 0 1,576 Medicare levy (1,000) (810) Net tax and Medicare levy (8,047) (3,053) After-tax income 41,453 41,453 Assumption: Janet s super account balance of $240,000 is comprised of a 70% taxable component and 30% tax-free component. This case study is used for illustrative purposes only. Assume investment returns of 5%. 6
7 Case study 2 Super Booster Roger, aged 56, is an engineer whose only income is a salary of $90,000 p.a. He enjoys his job and has no immediate plans to reduce his working hours. However, he believes age 65 would be a good time to retire from the workforce. Roger has a super account balance of $325,000 (all taxable component and fully preserved) invested in a balanced option that has historically earned 7% p.a. He has heard about the transition to retirement rules and is interested to find out how he can benefit. The strategy Roger s financial adviser suggests that he consider implementing a TTR strategy which requires him to salary sacrifice a significant portion of his pre-tax salary into his super account. However, Roger is concerned as he does not want to change his lifestyle or reduce his disposable income. Roger currently earns $90,000 in gross income, which provides him with a take home pay of $66,953. His financial adviser explains that if he salary sacrifices $26,450 p.a. from his salary into super, he will still receive $63,550 p.a. in gross income from his employer. He then explains that he can supplement his reduced income with pension payments of $21,230 p.a. from a TTR pension to be established with his existing super savings. This will mean that Roger s after-tax income will remain unchanged at $66,953. Roger s income overview year one Current position ($) With TTR strategy ($) Original salary 90,000 90,000 Salary sacrifice super contribution 0 (26,450) Cash salary 90,000 63,550 TTR pension (taxable) 0 21,230 Total income 90,000 84,780 Gross PAYG Tax (21,247) (19,316) 15% pension tax offset 0 3,185 Medicare levy (1,800) (1,696) Net tax and Medicare levy (23,047) (17,827) After-tax income 66,953 66,953 Assumptions: The Superannuation Guarantee is 9.5% of the original earnings base. No taxation deductions have been claimed. Qualifying private hospital cover is in place. This case study is for illustrative purposes only and figures relate to the 2015/16 financial year. 7
8 Case study 3 Income Booster Patrick, aged 60, is a telecommunications technician who derives a salary of $75,000 p.a. and has a super account balance of $400,000 invested in a balanced investment option that has historically earned 7% p.a. He currently plans on retiring at age 65. After accounting for taxes and Medicare levy, Patrick s existing take-home pay is $57,578. Patrick is happy with his current level of retirement savings. However, Patrick is looking at increasing his annual disposable income to $62,000. The strategy Patrick consults his financial adviser who explains that transition to retirement rules allow individuals who have reached preservation age (55 60, depending on date of birth) His financial adviser explains that he will need to use the money in his existing super account to open a TTR pension and that he can withdraw up to a maximum of 10% p.a. from the TTR pension account balance. As Patrick has reached the age of 60, his financial adviser informs him that pension payments received from his TTR pension will be tax free. His financial adviser suggests Patrick salary sacrifice $27,875 into super and draw an income of $22,387 p.a. from his TTR pension. The following table shows Patrick s change in cash flow position before and after implementing a TTR strategy. Patrick s income overview year one Current position ($) With TTR strategy ($) Original salary 75,000 75,000 Salary sacrifice super contribution 0 (27,875) Cash salary 75,000 47,125 TTR pension (tax free) 0 22,387 Total income 75,000 69,512 Gross PAYG tax (15,922) (6,863) Low income tax offset Medicare levy (1,500) (943) Net tax and Medicare levy (17,422) (7,513) After-tax income 57,578 62,000 8 Assumptions: This case study is for illustrative purposes only. The Superannuation Guarantee is 9.5% of original earnings base. No tax deductions have been claimed. Assumes historical earning rate maintained. Figures relate to the 2015/16 financial year.
9 Patrick s strategy would increase his disposable income in the first year, whilst also boosting his retirement savings. 9
10 Do you want to retire with a better future? A transition to retirement strategy could help you reach your financial goals. Contact your financial adviser to find out how. 10
12 Customer Services Phone Postal Address OneAnswer GPO Box 5306 Sydney NSW 2001 Website onepath.com.au OnePath Custodians Pty Limited ABN AFSL OnePath Custodians Pty Limited (ABN , AFSL ) is the issuer of this brochure. This information is current at January 2016 but may be subject to change. Updated information will be available free of charge by contacting Customer Services. The information provided is of a general nature and does not take into account your personal needs, financial circumstances or objectives. The case studies are hypothetical and are not meant to illustrate the circumstances of any particular individual. Before acting on this information, you should consider the appropriateness of the information, having regard to your needs, financial circumstances and objectives. You should read the relevant PDS available at onepath.com.au/member and consider whether that product is right for you before making a decision to acquire or continue to hold the product. The information in this brochure has been prepared as a guide only and does not represent tax advice. Please see your adviser for advice taking into account your individual circumstances. L3222/0116 onepath.com.au