TTR strategies still relevant despite work test changes, says CFS

Speaking in a recent CFS FirstTech podcast, Colonial First State head of technical services Craig Day explained that since the introduction of the transfer balance cap back in 2017, advisers have looked at implementing spouse equalisation strategies for clients with higher balances.

For couples where most of the super is in one spouse’s name and their balance is above the $1.7 million transfer balance cap, an equalisation strategy can be an effective way of enabling the couple to transfer more of their benefits into the retirement phase, explained Colonial First State senior technical manager Julie Fox.

Prior to the work test changes that came in on 1 July last year, Ms Fox noted that couples may not have been able to equalise their balances to the extent required due to the work test applying from age 67.

“In those types of situations, clients potentially needed to consider longer term strategies to try and equalise the balances in the lead up to retirement such as commencing a transition to retirement income stream or re-contributing pension payments back into a spouse’s account or via spouse contribution splitting strategies,” Ms Fox explained.

Ms Fox noted that with the work test for non-concessional contributions now removed, clients now potentially have all the way up until 28 days after the end of the month they turn 75 to implement equalisation strategies.

However, Ms Fox stressed that this doesn’t mean that some of the longer term equalisation strategies are now redundant as some clients may need to undertake multiple cash and re-contributions over a number of years due to the non-concessional (NCC) cap.

“Implementing a longer term strategy can still provide transfer balance cap benefits when a client reaches retirement if they need to undertake multiple cash out and re-contributions over a number of years due to the NCC cap limiting the amount that can be re contributed,” she noted.

“For example, if one member of a couple had accumulated more than $330,000 over the transfer balance cap, they’d need to cash out and re-contribute over a number of years due to the cap which extends the time that benefits would need to be retained in the taxed accumulation phase.

“Whereas if we implemented a re-contribution strategy involving a TTR or spouse contribution splitting in the lead up to retirement, we could potentially avoid having any excess amounts or at least reduce the excess to less than $330,000 at retirement. This means the excess could be cleaned up all in one year when they retired.”

Mr Day said that re-contribution strategies involving transition to retirement income streams have been used very effectively by advisers as a way of addressing transfer balance cap issues.

“This is where we’ve got one client that’s just hit 60 and they’ve got a very large balance already and they’re projected to be well and truly over their transfer balance cap by the time they get to retirement,” he said.

“What we can potentially do there is think about commencing a TTR from age 60. All the pension payments will be tax free. The amount that we take to start the TTR will vary but in a lot of circumstances it could be up to 100 per cent of member benefits. We then draw down the full 10 per cent and then take those payments and re-contribute them back into the spouse’s account as a non-concessional contribution.”

Mr Day said that implementing a TTR strategy like this for clients that are still four or five years till retirement can help them to equalise their balances and remove or reduce any amounts above the transfer balance cap.

“If we can reduce that excess down to at least $330,000 we can then address that right away at retirement so its a very viable strategy to consider.”