Transition to Retirement (Detailed)

The purpose of this Case Study is to demonstrate how to significantly boost your Superannuation balance while at the same time maintaining your current level of disposable income, but allowing you to pay less tax whilst optimising your salary sacrifice contributions to Super.

The scenario

We have helped people in similar situations solve this problem. For example, Maria who engaged us in July 2013.

Maria called into our accountants asking for advice on how to maximise her retirement position. Maria was 56 years old and was looking to retire at age 65 in 9 years time. After a marriage lasting 30 years she suddenly found herself divorced with her only assets being her Industry Super fund with $109,456 in it and her home that she lived in valued at $470,000. She also had $25,000 in cash in her emergency fund which she didn’t want to touch for obvious reasons.

She didn’t want to deal with a financial planner stating “that’s why I have called you as an accountant as Financial Advisers will charge me too much.”

I advised her that I am in fact the Financial Adviser in the accounting practice and whilst saving tax usually requires you to lose money that perhaps there was something I could do to add more value to her fund than I would charge and if I could prove that to her would she at least agree to meet with me.

Maria’s monthly budget was neutral, she wasn’t overspending but then she wasn’t really saving either. So although she wanted to salary sacrifice funds to boost her Superannuation balance and reduce her income tax on her pay, she could not afford to do so without somehow also being able to increase her income in some way.

Complications

However, all client scenarios are unique. And in this case there were a number of complications that needed to be considered.

Maria did not want to ‘pay’ a financial adviser for advice – she felt she would be expected to pay more than what the actual advice was worth to her.

Maria wanted to salary sacrifice to reduce her personal income tax and to boost her funds in her Industry Superfund but she couldn’t afford to give up the income she needed to meet her monthly expenses.

After trying to figure it out for herself, Maria was now uncertain of what she could be doing to improve her situation; hence she sought professional advice and was fortunate to come across our In-house accountants who immediately recognised she needed to speak to a financial adviser. Strangely, the professional she was against speaking to.

Options

A number of potential solutions needed careful consideration, including:

The accountants had already looked at Maria’s personal tax situation and had determined that there was little they could do or recommend to her to reduce her personal tax or increase her disposable income to allow Maria to meet her objectives of reducing tax, increasing her income, making a salary sacrificed contribution to Super and boosting her Superannuation balances.

Solution Proposed

The most suitable solution for this client involved increasing her income by investing in a Transition to Retirement Income Strategy (TTRIS). In essence, Maria would be moving a portion of her Industry super balance into a Pension, namely an amount of $88,787 via a rollover to commence a pension, she would immediately begin to benefit from the 0% tax rate for funds held under super in pension phase. Maria would also be able to access the 15% pension tax offset through to age 59 and tax free from age 60.

Her income of $92,000 would be increased by her annual pension of $8,878. Maria would be able to begin her salary sacrifice strategy by investing $11,042 per annum thereby increasing the overall Super Guarantee contributions made on her behalf by her employer from $8,510 to $19,552 per annum. Her personal income tax will drop from $23,367 to $21,202 delivering a saving of $2,165 per annum. However, her take-home pay would still be $68,633 after taxes.

Graphical representation of Current versus Proposed Transition Strategy in the first year.

Please Click on the Graphics to see the Full Picture!

Graphical representation of Current versus Proposed Transition Strategy in the first year.Spreadsheet showing Value

 

Tabulated depiction of the strategy over the proposed duration of (9 years) by year showing the recommended Salary sacrifice position, recommended Pension Payments and the neutral effect these proposals will have on Maria’s monthly take home pay. However, the final column “Change in Personal Tax Paid” shows the annual tax advantage that the strategy delivers to Maria.

However, the tax advantage is only part of the story. The proof of the strategy lies in the difference that is made to Maria’s Superannuation fund balance. The table below highlights this on a year by year accumulative basis showing that Maria is ultimately benefitted to the extent of $59,981 over the nine year investment period.

Accumulated Benefits

To recap, Maria is able to increase her final balance in Superannuation by $59,981 by structuring a Transition to retirement strategy over the next nine years. She is able to increase her annual income through receiving a Transition to retirement pension from her Superfund and she is then able to use this increase and the tax benefit to salary sacrifice towards further boosting her Superannuation Balance. Maria saves tax, she salary sacrifices to Super and still meets all her previous expenses as she did not reduce her disposable income at any time during the nine year strategy. She was delighted with the potential $59,981 increase in Super which she felt was well worth the fees she paid to receive the advice.

As Maria has contracted us to provide ongoing advice and service to her, she comes in regularly to discuss the performance of both her accumulation and Pension components. Every two years we reboot the strategy to keep the strategy current and up to date with the environment and to ensure that Maria can maximise the pension component of her Superfund that benefits from the 0% tax rate.

What our clients say…..

Our clients tell us that our dedication and care for their individual circumstances, and the time we spend educating them about how the strategy works and how it will benefit them mitigates the risk they previously were concerned about when dealing with an adviser. They feel we are a great sounding board for them and we save them hours or time and money by recommending, advising, implementing and reviewing their strategies to keep them on track. This helps them build a better life and gives them and their families the peace of mind they need which makes all the difference.

 

Outcome

If Maria had not come in to see an adviser her Superannuation Fund would have grown to the projected amount of $289,212 by her retirement age of 65, however, because she chose to seek the advice of our Financial Adviser, she can now expect a final superannuation balance of approximately $349,193. Hence, as a result of implementing the above strategy, Maria can expect an enhanced value of approximately $59,981 (20.7%) from her combined Superannuation balance in retirement.

NOTE: The assets used to fund a pension will from 1st July 2017 attract Superannuation Tax. This will reduce the tax advantages but the strategy still has value for many.

Important Information

Information in this web page is based on regulatory requirements and laws, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Synchronised Business Services Pty Ltd, its related entities, agents and employees for any loss arising from reliance on this document.

The advice contained on this site is general in nature and has been prepared without considering your objectives, financial situation or needs. You should, before acting on any advice, consider its appropriateness to your circumstances (including your objectives, financial situation and needs). You should also consider the relevant PDS before making any decision about any product.

Gavin Bramley is an authorised representative of Synchronised Business Services Pty Ltd. | ABN 33 007 207 650| AFSL No.  243313