I had a conversation with my father-in-law last weekend which was initiated by his severe annoyance about a recent event.  Although he loves the Collingwood footy club, it wasn’t their unexpected loss to the Blues on the previous Friday night – it was the realisation the reduction to the concessional super contribution cap to $25,000 had kicked in and was going to affect his existing transition to retirement strategy.

His main question was, “Why would I bother to continue with the TTR?”

For young accumulators who are building their careers and spending hard earned cash on mortgages, car loans and, hopefully, regular investing; a reduction to a cap they would not likely get close to in the first place isn’t a huge concern.  For people like my father-in-law who have the kids off their hands, have no debt to speak of, and are often earning more than they ever have, it is very feasible that a combination of employer SG contributions and their own salary sacrifice might exceed $25,000pa

And so, back to the question – why bother to continue with the TTR strategy?

Let’s work through a very basic scenario of a typical (imaginary) person:

–          Age 60

–          Super balance $500,000

–          Superannuation Income $100,000

–          Super Guarantee contribution at 9% $9,000

–          Tax (assuming no other deductions) $24,947

–          Net income $75,053

So, keeping it simple, under the old rules our imaginary person salary sacrifices the balance of their concessional cap, $41,000.  This brings their taxable income down to $59,000 and their tax to $10,722.  Even if they need all of their normal net income to fund lifestyle this means they would only need to pull $15,000 from their super pension to continue living it up whilst  boosting retirement savings.

Flash forward to the reduction in the cap and we see after the SGC is paid they can now only salary sacrifice $16,000.  In turn tax only reduces to $19,027 leaving them net income of almost $65,000pa.  If they pull out the $10,000 to fund the gap of lifestyle costs then super is only boosted by around $3,600 (after the deduction of contribution tax)   I admit it is less appealing, but let’s be glass half full for a while.

– Super is still growing through increased contributions compared to if the strategy was not in place

– Tax is still being reduced (from nearly $25,000 to about $20,000)

– The bulk of retirement savings are in a tax free environment.

One of the often overlooked strong suits of the TTR strategy is once super benefits are rolled into pension phase, any growth within the fund is tax free.  If our imaginary person wanted to end their TTR strategy and rolled benefits back to super they might pay around $5,000 in tax on growth through the fund compared to it being in pension phase and tax free*.

For some, maintaining a TTR strategy will now mean there is surplus income for the household. Sometimes we overlook the non-concessional contribution strategy as it doesn’t play a role in tax reduction. However, it still lets you get up to $150,000 into super in one year.  At certain intervals it may be reasonable to ‘add’ the growing super balance to the super pension and so gain from the lovely tax free environment.

Ending a TTR strategy is perhaps an extreme reaction to the changes in legislation – although it shows the need to speak to your adviser before going off and making decisions.

Probably the most important lesson to take from the conversation was don’t make important financial choices on the back of your footy teams result!

*Assumes 7% growth on $500,000 taxed at 15%

By Gareth Daniels, Associate Financial Planner