STRATEGY
Rethinking salary sacrifice/TTR strategies Strategies combining salary sacrifice arrangements with transition-to-retirement income streams have been significantly affected by legislative change in the past few years. Rob Lavery examines the opportunities that now exist with these plans.
ROB LAVERY is senior technical manager with knowIT Group.
Combining a salary sacrifice arrangement with a transition-to-retirement (TTR) pension has long been a strategic staple of pre-retirement planning. The tax savings combined with the ability to augment potentially reduced income has obvious appeal. Over the past three-and-a-half years, however, there have been significant legislative changes that have impacted on the efficacy of salary sacrifice/TTR strategies. The introduction of personal deductible contributions for employees, the movement in tax brackets and offsets, and the changes to the preservation age have all shifted the goalposts. It means now is a prudent time to take a look at salary sacrifice/TTR strategies with a fresh set of eyes to determine how SMSF members can make the most of the opportunity.
Salary sacrifice/TTR in a nutshell In brief, the strategy is for members who have reached preservation age, currently 58. The member: 1. Salary sacrifices part of their employment income into superannuation, and 2. Rolls part or all of their superannuation accumulation balance into a TTR pension, income from which can be used to supplement the sacrifice salary. The lower rate of tax on pre-tax contributions to super, as compared to the member’s marginal tax rate, means they may be able to achieve a tax saving. If the member is aged 60 or over, the pension payments are tax free and this accentuates the tax saving. Prior to 1 July 2017, further tax savings could be made as investments backing a pension were taxed at a lower rate than those supporting an account in accumulation phase. Since this date, assets backing a TTR pension have been subject to the same rate of tax as those in the accumulation phase. If the
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member has unrestricted non-preserved benefits, or has met a complete condition of release, such as turning 65, they are able to commence a non-TTR pension and can again benefit from this tax saving on pension investments.
The strategic lens For the sake of the analysis that follows, only the taxable component of a pension is considered. While the proportional drawdown rules don’t allow members to only withdraw the taxable component from a TTR pension, it is only the taxable component that can produce a true tax saving. Withdrawing the tax-free component from super is similar to a member living off their accrued savings – they have already been taxed on that money before it was contributed to super, so its withdrawal does not represent a tax saving. For the purposes of this analysis, we are concerned with replacing income that is diverted to super.
Preservation age to 60 The preservation age represents the earliest time from which most members will be able to execute a potentially tax-effective salary sacrifice/TTR strategy. On 1 July 2020, the preservation age moved from 57 to 58. Up until July 2016, preservation age was 55. Previously, it had been common to look at salary sacrifice/TTR strategies in two groups: 1. preservation age up to the 60th birthday, and 2. those age 60 and over. The age span covered by the first group has gradually dropped from five years to two. During that time, the tax saving on investment returns backing a TTR pension was also removed. These two factors have heavily eroded both the number of members who could benefit from such a strategy
