Nick Bruining: How to tap into superannuation and pay off your home loan or credit cards while still working

Transition to retirement is a strategy often promoted to seniors approaching the end of the daily nine-to-five. And while in many instances it is a valid tool that can save income tax, it’s particularly useful for people who owe money on non-tax deductible debts like a mortgage or personal loan. Using transition to retirement properly could save you thousands in tax and interest on your loans. In simple terms, those with a mortgage or other debts can start to use their super to reduce debt now, even if they are still in the workforce. A transition to retirement income stream, or TRIS, is a hybrid account-based pension fund that sits somewhere between superannuation in accumulation phase and superannuation in retirement phase. ABPs allow you to draw down a percentage of the fund’s balance each financial year. For someone under 65, the minimum amount that must be accessed is 4 per cent of the June 30 account balance, or the starting balance if you commence the pension after July 1. The maximum you can access is 10 per cent of that balance, which is unique to a TRIS. When you retire, that 10 per cent restriction is removed and you can access as much as you like. The other difference between a TRIS and a conventional ABP is that earnings within the fund continue to be taxed at 15 per cent whereas a “proper” retirement-phase ABP pays no tax on the earnings. Significantly, if you start the TRIS or any ABP after July 1, the percentage drawdown is done on a pro-rata, so starting one half way through the year, say in January, would mean the maximum amount you could access from the TRIS is 5 per cent. In other words, if you think paying off your debts this way might work for you, the sooner you do it the better. It is only available once you reach the superannuation preservation age, which is now 59. You can move all or some of your super into the TRIS. In practice, you would keep the accumulation fund open with a small amount so that future employer and member contributions can continue to be made. Equally, starting a TRIS at 59 means the income you draw from the fund will be taxable, and while coming with various tax offsets to reduce the tax effect, it is complicated and messy. In most cases, you are better off waiting a few months until your 60th birthday. Once you are over 60, any payments from the TRIS are completely tax free. With a conventional ABP, you would normally set it up to make monthly or fortnightly payments to line up with your cashflow needs. However, there’s nothing to stop you taking out the entire 10 per cent as a single annual payment. If you go down this path, you could have your transition to retirement ABP set up and the 10 per cent out and off your mortgage in a matter of days. That’s an entire year’s worth of interest saved on the amount you pay off your loans. Next July 1, you do the same thing and whack another 10 per cent payment off your debts until hopefully they’re all cleared. With interest rates rising almost monthly, getting rid of the dead money paid to your bank in the form of non-tax deductible interest payments makes perfect sense. Or pump up your super If you are lucky enough to be debt free or have spare cash each pay day that’s looking for a home, there’s a way of pumping tens of thousands into super over the next 12 months, using salary sacrifice. It’s all tied to a rule that allows you to use unapplied concessional contribution caps from previous years. Each year, we have an annual concessional contribution cap of $27,500. When the cap scheme started in 2018, the annual limit was $25,000 but it rose to $27,500 last financial year. From July 1, and using the unused rollover rule, your limit is effectively two years at $25,000, last year’s $27,500 and this year and next financial year at $27,500 each. That gives you a grand total of an impressive $132,500 over the five years. Off this total, you need to subtract what has already been paid in. That includes personal contributions where you claimed a tax deduction, any amount the boss paid or will pay under compulsory arrangements and pre-existing salary-sacrificed amounts. As an example, we’ll say your grand total works out to be $52,000, leaving you $80,500 unused. Here’s the neat trick. As long as your total super account balance is less than $500,000, you could pay this in as a lump sum and claim a tax deduction — or better still, arrange to salary sacrifice an impressive $3100 a fortnight into super. Total super balance is the grand-total of all money in the super system in your name, including accumulation and pension funds. Perhaps that’s the money you’re no longer paying to your bank as a mortgage payment. Remember that this amount is subject to a minimum contributions tax of 15 per cent but it’s more than likely to be much less than your personal marginal tax rate. Nick Bruining is an Independent Financial Adviser and a member of the Certified Independent Financial Advisers Association