There has been speculation in the press and the superannuation industry that the upcoming Budget will stop transition to retirement pensions. If transition to retirement pensions are abolished, we expect existing pensions commenced prior to this will be grandfathered.
There has also been speculation that concessional contribution caps will be reduced from $50,000 to $25,000 (and from $100,000 to $50,000 for members aged 50 or more). While we expect any cuts to the concessional contributions cap will apply from 1 July 2009, it would be a good idea for anyone intending to make a concessional contribution this year and who like to sleep easy, to make the contribution before 12 May 2009 if they have the cash available now.
Transition to retirement pensions allow members who have reached preservation age but are still working to commence a pension. Transition to retirement pensions are essentially account based pensions but with some additional restrictions - members can only draw down 10% per annum of their pension account balance and cannot be commuted and a lump sum withdrawn.
The rationale behind introducing transition to retirement pensions was to facilitate a transition from full time employment, to part-time employment and then retirement by assisting people in reducing their work hours while supplementing their income with a pension. This was also seen to have the ancillary benefit of encouraging employees to remain in the workforce for longer.
There is now speculation that transition to retirement pensions are on the chopping block as the government looks to rein in the deficit and increase revenue. Transition to retirement pensions are often combined with a salary sacrifice strategy that can be highly tax effective as an employee can reduce their income tax, while any income derived from the fund assets supporting the pension is tax free. However, this strategy is also consistent with the underlying purpose of superannuation - to increase the number of self-funded retirees by encouraging people to contribute to super.
Hall & Wilcox can prepare transition to retirement or account based pensions.
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