Super countdown: Nerida Cole

With tax about to change, it may be time to roll back your account

Transition to retirement pensions (TTRPs) aren’t limited by the $1.6 million pension transfer cap but from July 1 they are facing a separate change. In brief, there will now be two types of taxes that will apply to new and existing TTRPs, regardless of the balance. So here’s what you need to consider if you set one up, or are assessing if you should keep your existing account going.

Two types of tax

TTRPs can pay out between 4% and 10% of the balance each year. Fortunately, the tax on payments coming out of the account won’t change after July 1. If you are 60 or over, payments are tax free and for those 56-59 the tax remains the same as in previous years – 15% less than your personal marginal rate, sometimes even lower.

It’s the tax rate inside the TTRP that’s changing. At first, it might not be clear how this change impacts you, so let’s break it down. From July 1 a 15% tax rate will apply to income (interest, dividends) and 10% to capital gains (for investments held for at least 12 months) generated inside a pension. These are the same tax rates that apply in accumulation accounts, which makes calculating the cost-benefit payoff of starting a TTRP versus keeping your money in the accumulation phase until full retirement much tougher.

If you’re not sure if you should keep or start a TTRP, check the comparison in the table.

Tax-free cash flow

If you’re 60 or over, after July 1 there will be no tax difference between a TTRP and holding super in an accumulation account. But this type of pension gives you access to a tax-free cash flow that may be very valuable for reducing debts or helping you to gradually reduce your work hours.

For many pre-retirees under 60, starting this type of pension will now increase their tax burden, compared with holding money in accumulation phase. If you’re in this age bracket, starting one may only be appropriate where the need for cash flow is very high due to mortgage pressure, job loss, private school fees or unexpected expenses. However, for low income earners and those who have built their super from non-conces- sional contributions, this type of pension may still be tax effective, as the payments are likely to attract very little tax, even if you are under 60.

If you’re a couple and one of you has a large super balance, the annual pension payment could help you re-allocate some of your balance to your spouse’s super. This will be more important in the new super regime, as couples are more likely to optimise the amount they hold tax free in retirement if super is evenly held.

If you’ve reviewed the options and you don’t need the cash flow or there’s no strategic reason to keep your TTR income stream running, you may need to consider rolling it back to an accumulation account. But it’s advisable for most fund types not to stop the account until after July 1, if retaining eligibility for capital gains tax relief is beneficial. Most bigger super funds are expected to provide information packs to members with TTR income streams.

Before June 30 there are some last-minute tasks to get your finances in check before the new rules take effect. Next month we’ll cover these, as well as end-offinancial-year strategies.