2. The need to have enough accumulated super to begin with
There are many cases I’ve seen where clients simply don’t have enough accumulated super to ‘switch on’ a TTR pension. But how much is enough? It’s basically the level that can generate an income that is not going to be more than the amount the client is salary sacrificing plus SG (after contributions tax) plus earnings.
For example, in the situation given above, Mary was salary sacrificing $40,100 a year ($34,085 a year after contributions tax). She was also receiving $9900 in SG ($8415 a year after contributions tax). But she was only drawing $6790 a year from her accumulated balance. With a starting balance of $250,000, $3790 a year represents a drawdown rate of only 2.7 per cent. Clearly her super is accumulating.
But what about a client on with only $200,000 currently in their accumulated super? A four per cent drawdown is only $8000 a year whereas a 10 per cent drawdown is $20,000. A client on $100,000 a year seeking to salary sacrifice up to the maximum cap (including SG) but wanting as much as possible to equalise their pre- and post-TTR income can be motivated to draw the maximum (which can stretch the fund’s ability to sustain in the current earnings environment) and end up prematurely exhausting their accumulated super and virtually starting from scratch on their plan of accumulation.
3. The need to be worthwhile
TTR can be a great help in both managing income tax here and now, and in building a nest egg towards retirement. But it is not a one- or two-year strategy.
The essence of the strategy is to give those clients aged between 55 and 64 (as super becomes automatically unpreserved at 65) the ability to turn on a non-commutable income stream.
I see that this strategy services three distinct age groups;
- those aged 55 to 59 – where the TTR pension is potentially taxable with a 15 per cent rebate (where the fund has a taxed taxable component)
- those aged 60 to 64 – where the TTR pension income is tax-free
- those aged 65 and above – here they continue to work (thereby meeting the work test) and to contribute to super with the only difference being that their TTR pension is now unpreserved (commutable).
For many people, this presents an accumulation period of perhaps 20 years after reaching age 55.
It is important that clients know the accumulation goal they are trying to achieve (which is usually based on the level of capital required to fund their lifestyle requirements from the date of retirement for the rest of their lives). In regular reviews of their strategy both the adviser and their clients are able to see a steady accumulation of their combined super (ie their accumulation account growing with salary sacrifice, SGor deductible contributions, and potentially non-concessional contributions from asset sales and inheritances) and pension accounts over time.
If it becomes apparent that the accumulated lump sum that has been used to fund their TTR pension is not adequately coping with the rate of drawdown (for example, because the level of drawdown is set too high or because of adverse market movements that impact the capital value of the pension), then the adviser can re-work the strategy to ensure that the cumulative drawdown of the TTR pension is not accelerating above the earnings the fund is able to generate to maintain capital.
4. The need to track income being drawn
As mentioned in the earlier example, a rate of salary sacrifice in excess of the amount being drawn as an ABP can really boost preretirement savings in superannuation over the period prior to retirement.
But as we know, the income that can be drawn from a non-commutable ABP (also called a transition-to-retirement income stream – a TRIS) can be nominated by the member to be a minimum of four per cent (this figure has been halved for the currentyear) up to a maximum of 10 per cent. Some people don’t just try to equalise their preand post-salary sacrifice income with the TTR pension. They might increase the total income received to better help service debt and so have their home loan paid off sooner, or simply because of the increasing cost of living, they might need a boost to their current income. The trap comes in drawing more than what is being accumulated. This has been more apparent than ever in the current volatile earning environment. But even in a positive earning environment, where the fund is earning seven per cent and the member is drawing income at 10 per cent, capital is being depleted.
A last issue to consider is to make sure that your TTR clients are on a marginal tax rate that provides them some tax benefit in salary sacrificing to begin with. If they are low-income earners, it is possible that the contributions tax rate is the same (or more than) their current tax rate (taking into account the tax-free threshold and low income tax offset). For these clients, a non-concessional contribution to super that picks up the Government co-contribution is potentially the better strategy.
Time for a check-up?
TTR strategies need constant review andclients need to know that their strategy is working for them.
In the light of volatile investment returns and legislative uncertainty around the proposed 1 July 2012 end-date for the transitional concessional contributions cap, it’s never too soon to revisit your TTR clients and perform a “TTR health check” to ensure they don’t prematurely exhaust their capital (either by drawing too much, accumulating too little or because negative returns have not impacted them too severely) and that they are actually building their combined superannuation pool.
