If you’re 55 or over, stop what you’re doing and read this.
If you’re under 55, forward this on to your parents (and any other salt-and-peppered-haired loved ones). Please, make sure they read it — and act on it.
Today I’m going to walk you through one of the last ‘free lunches’ in finance: it’ll save you thousands in tax, boost your super, requires zero extra work, and it’s totally risk-free.
And for all the reasons mentioned above, it’ll almost certainly be abolished (or severely cut back) in the latest round of superannuation ‘reforms’ (read: tax grabs).
Yet here’s the thing: I’m also betting that the Government will ‘grandfather’ anyone who is wise enough to put the strategy in place before they axe it.
(Grandfathering: letting you get away with something because you’re already doing it — riding a motorbike, tattoos, having a boyfriend — but putting a blanket ban on your siblings doing it, even though it’s like “soooo unfair”).
So the bottom line is, you need to act quickly.
I’m talking about putting in place a ‘transition to retirement strategy’ or ‘TRIP’ as it’s called by the guys in cardigans — which is actually deathly boring. So boring that it’s been around for a decade and yet most older people can’t be arsed doing it.
Legend has it that the transition to retirement strategy was dreamed up on a whiteboard in Canberra as a bribe to keep Aussies at work, rather than on a Trafalgar tour. “This strategy will incentivise older Australians to continue working and slowly transition to retirement”, they said.
In reality, most people use it as a tax dodge.
So here’s how it works:
Once you’ve reached your ‘preservation age’ you can access your superannuation.
Hold the phone: ‘preservation age’, strange term, right?
It conjures up images of a good cellared bottle of wine that’s ripe to uncork and devour. Or perhaps that you’ve reached an age where your only contribution to science is to be housed in a giant liquid jar, pickled and preserved for bored high school students to throw spitballs at for all of eternity.
Actually, your preservation age is nothing more than the age at which the Government will let you get your mitts on your super balance. If you were born before 1 July 1960 (i.e. aged 55 or over), you qualify.
The guts of it is that you salary sacrifice into super (before-tax contributions) and replace that sacrificed income with a tax-free pension payment (if you’re over 60), or low-taxed payments (if you’re under 60).
A TRIP strategy allows you to start pulling money out of your super without having to retire: you’ll have the same income, pay less tax, and boost your super … totally risk-free.
Let’s look at the directions recipe to cook up some tax savings.
How Marg Increased Her Super Payout by $62,444 Doing Sweet Stuff All
Marg is a sprightly 60-year-old who wants to boost her super in the last seven years of her working life.
She earns $100,000 a year ($75,053 in the hand after super and tax) and has $250,000 in super, invested in a balanced option.
Marg’s boss is paying 9.5 per cent of her wages into her super fund ($9,500), which is well under her before-tax cap of $35,000 (it’s $30,000 for people under 49).
(The Government caps what you can put into super because the tax savings in super are awesome: super contributions are taxed at 15 cents in the dollar, whereas Marg’s wages are taxed at 37%. That means Marg is effectively able to boost her super by $22 for every $100 she puts in).
Add One Part Tax Savings.
Marg likes the idea of saving tax, so she decides to max out her contributions by salary sacrificing the additional $25,500 into super (i.e. $35,000 minus $9,500).
Add Two Parts Tax Free Income
Now because Marg is over 60 she can talk to her super fund and begin drawing a tax-free pension that will replace the income she’s sacrificing into super.
Marg decides to draw $15,803, which, combined with her wages, gives her $75,053 — the same after-tax amount she’s earning now.
Then, Lick The Bowl Baby!
Here’s the thing: if Marg continues doing this transition to retirement strategy for the next seven years before she retires, she’ll boost her super balance by $62,444.
As Bruce McAvaney would say, that’s ‘special’.
Your Trip Details
A bit of fine print: with a TRIP you must withdraw at least 4 per cent of your assets each year, up to a maximum of 10 per cent — but you can’t take a lump sum and head to the casino (thankfully).
The other thing is that not all funds offer TRIPs, so you should talk to your super fund to see yours does. If you have a SMSF, you need to check that it allows them in the trust deed (ring your accountant).
Another bonus is that when you switch to a transition to retirement pension, the assets backing that pension become tax free — so any income or capital gains made from your investments are tax free.
It’s a tax orgy!
Old stubby fingers, your accountant, will be shaking with anticipation!
And because the Government is scrounging around for savings to pay down the deficit, it’s unlikely the transition to retirement strategy will stay around for too much longer. So here’s the bottom line: if you’re over 55 — or you know someone who is — put this column under their nose and dial their super fund’s number.
Tell them Barefoot sent you.
Tread Your Own Path!