Intelligent financial planning can contribute to financial freedom in a myriad of ways depending on one’s objectives, income, age, marital status, health, financial position and many other factors. In this series of articles, we concentrate on General Advice that is applicable to the majority readership of “Over 50s”.
In this edition, we will examine how many people might benefit from what is known as a TTR, or Transition to Retirement, strategy. Since this advice does not take into account your personal objectives, financial situation or needs, you should not act upon it without considering its appropriateness taking into account those matters.
If you are 55 or over, still working and don’t have a financial plan, there is a good chance you are paying more tax than you need to. This is not always the case, but it often is and readers are encouraged to seek out professional financial planning advice to assess their particular circumstances.
The opportunity stems from the incremental nature of our income tax system along with government attempts to assist us to better prepare for retirement. The latter, quite logically, is influenced by the imperative to control Age Pension costs especially given our ageing population. The consequent position is that the superannuation taxation system includes opportunities to lower taxes today in return for building retirement savings, which benefits both the individual and the nation.
The basic income tax rules are that the first $18,200 of income is tax-free, the next $18,800 is taxed at 19%, the next $43,000 at 32.5%, the next $100,000 at 37% and any additional income is taxed at 47% (including the temporary budget repair levy of 2% which applies to incomes over $180,000). In addition, the Medicare levy is a general 2% and subject to its own threshold rules. Within super earnings are generally taxed at 15%, but provision exists to allow funds to be transferred into pension phase in certain circumstances where the tax rate on earnings is zero.
“Many employers will allow employees to salary sacrifice into super”
Once Australians have reached what is called their preservation age – currently 55, but moving up gradually to 60 in future years – they are entitled to start drawing money out of superannuation savings. If they are still working they can elect to set up a TTR pension account and withdraw a minimum 4% (if under 65) and a maximum 10% of the account balance each financial year. Funds withdrawn in this manner are
taxed on a concessional basis. The tax payable on any amounts classified as tax-free will be zero and on any amounts classified as Taxable – element untaxed (most of the money in superannuation funds is classified in this manner) will be taxed at the individual’s marginal tax rate less 15% if the taxpayer is under 60 and zero if they are 60 or over.
Many employers will allow employees to salary sacrifice into super. This can be used to replace and increase funds withdrawn as a pension. When money is salary sacrificed into super, it is generally taxed at 15% rather than the individual’s marginal tax rate, which for many people is 34.5% or higher including the Medicare levy.
With careful planning the totality of the above can often be used to achieve:
A) The same cash flow with lower taxes with the benefit adding to superannuation savings
B) Better use of excess cash flow to accelerate superannuation balances even more
C) Increased cash flow without damaging savings
D) Slightly reduced working hours with the same cash flow and super savings
E) Significantly reduced working hours while maintaining cash flow by utilising super savings
Clearly, this is more than a little complex, but the simple truth is we often have the ability to move funds from one tax rate position to another. Savings are often several thousand dollars per year. If you are interested in exploring how the TTR rules might benefit you, I encourage you to seek out a reputable financial planner to help explore the costs and benefits given your own particular circumstances. Check first that your initial consultation will be free of charge and on a no-obligation basis, which is what many highly qualified planners offer.
Article provided by Paul Goodman*
Financial Planner – Wealth Financial
Partners Robina, email: email@example.com *Financial Adviser and Authorised Representative
Hillross Financial Services Limited ABN 77 003 323 055 AFSL and ACL Licence number 232705