Transition to Retirement & Income Swap Strategy

By Ryan Humphries (AR 130 9222)

What is the Income Swap Strategy?

The income swap strategy is a clever approach where you contribute to your super while withdrawing from it simultaneously. By making concessional contributions you only pay 15% tax instead of your marginal tax rate. This tactic helps you grow your super balance as you then withdraw enough funds to match your original take home pay (before making the initial concessional contributions), leaving the extra tax savings to remain growing inside of your super. 

If you’re approaching retirement and looking for a strategy to reduce your taxable income, this strategy could help you gain access to FREE money that would otherwise go to the ATO, for no reason. *Yes, this is completely legal*.

What is a Transition to Retirement Account?

 A Transition to Retirement Account (TTR) is the heart of how you can take advantage of the Income Swap Strategy. This TTR account lets you access some of your super and keep working at the same time. You are allowed to open a TTR account when you have reached your preservation age (between 55 and 60).

A TTR account does not give you full ‘unrestricted access’ to your super. You must meet a full condition of release for this, such as completely retiring from the workforce. However, a TTR account still allows you to withdraw up to 10% of your account as a maximum yearly withdraw. With the minimum withdraw requirements starting at 4% and rising to 5% as you reach the 65-74 age bracket.  *The minimum withdraw requirement does increase further after age 75. However, this is not relevant to this specific Income Swap Strategy page. 

Originally this TTR account was designed for individuals approaching retirement and instead of completely ceasing work. Rather, transition to part time or casual work and have your superannuation make up the difference of the lost income, due to the reduced workload.

This allows you to start planning what you’ll do with your leisure time before you retire completely.

However, there is a second overlooked advantage to the TTR strategy that allows you to pay less tax on your income instead. This is the Income Swap Strategy.

Who is eligible to use the Income Swap Strategy?

This strategy is primarily designed for anyone between the ages of 60 and 74 who are still working and is eligible to make additional concessional contributions. Here’s a breakdown why. 

As we covered in the Transition to Retirement Account section. You can start withdrawing from superannuation once you have reached your preservation age even if you are still working. The reason why its best to be over the age of 60 for this Income Swap Strategy is your TTR pension payments are tax free after age 60. Whereas if you are 55-59, your pension is taxed at your marginal tax rate, but you get a 15% tax offset.

Anyone under the age of 75 can make concessional contributions to super, however if you are over the age of 67 you must satisfy the work test or work test exemption. This allows you to claim the contributions as a tax deduction, which is a requirement for this strategy.

The taxation on concessional contributions inside of superannuation is 15% regardless of your own marginal tax rate outside of super. Therefore, for this strategy to work, you would ideally be on a tax bracket higher than 15%. The higher tax brackets (for example 45%) provide a greater tax savings benefit.

Since the $18,201 - $45,000 bracket is only a 16% tax rate. There is not much savings different. Only being able to save 1% as the difference. However, Ideally you have an income of $45,000 or higher as the tax rate jumps to 30% for any income above this amount. As a 15% tax rate is significantly less than 30%. Anyone with an income above $45,000 that meets the other requirements would greatly benefit from the Income Swap Strategy.

Another key component is to ensure you are not already contributing the maximum when it comes to your concessional contributions, which is currently $30,000 for the 24/25 financial year. Note your employer contributions count towards your available concessional contribution limits. Meaning if your employer already contributes $25,000 as employer contributions on your behalf. You would only have $5,000 left in available concessional contributions for the financial year.

Although, you may have additional unused concessional contributions from previous years. You can then utilise the ‘carry forward rule’ that allows you to use your unused concessional contributions amounts from previous years. Utilising the ‘carry forward rule’ could potentially grant you additional tax savings.

How does the Income Swap Strategy work?

To keep it simple. While drawing down an income from super you simultaneously make voluntary concessional contributions to your super which are taxed at 15% instead of your marginal tax rate. If this is done correctly, your take home pay should not change, and you should get an extra tax savings benefit that remains within your superannuation.

Here is an example in practice.

John Doe is 60 years old with an income of $100,000. He therefore is on a 32% marginal tax rate (including the 2% Medicare levy). We will assume John has no other deductions or offsets and that his employer contributes the minimum ‘Super Guarantee Charge’ (SGC) of 11.5% in addition to his $100,000 salary ($11,500 as concessional contributions to John’s super fund). We will also assume John pays for private healthcare cover and therefore does not pay any other Medicare Surcharge.

John has a few options.

1. John can do nothing to change his current situation. His taxable income for the year is still $100,000 and therefore pays approximately $22,788 in income tax for the year (including the Medicare levy). His effective take home pay is $77,212 per year or $1,484 per week.  His $11,500 that his employer contributed to super is taxed at 15%. Therefore, John has $9,775 ($11,500 X 0.85) as his Net contributions going into his super. John has effectively paid $1,725 of tax inside of super. If we combine John’s Income tax and super tax paid together. He has paid a total of $24,513.

2. John could instead set up a salary sacrifice agreement with his employer (make voluntary concessional contributions to super) for $18,500 per annum which is his remaining concessional contributions limit. All while opening a TTR account as an extension to his regular accumulation super fund account and drawing down an income that is yet to be calculated. By doing this first step John will reduce his taxable income down to $81,500 ($100,000 - $18,500). Therefore, John pays approximately $16,868 in income tax for the year (including the Medicare levy). His effective take home pay is now $64,632 per year or $1,242 per week. His $11,500 (SGC) + $18,500 (Salary Sacrifice) that Jonh’s employer contributed to his super is all taxed at 15%. Therefore, John has $25,500 ($30,000 X 0.85) as his Net contributions going into his super. John has effectively paid $4,500 of tax inside of super. If we combine John’s Income tax and super tax paid together in this example. He has paid a total of $21,368.

This is a net tax savings amount of $3,145 ($24,513 - $21,368). Including both the Income tax and super tax combined. John is financially better off with having implemented the TTR and Income Swap Strategy.

You might be worried that John now has less money in his take home pay. But this is where the TTR draw down comes into play. The difference in John’s take home pay between the first examples is currently -$12,580 ($64,632 - $77,212). However, now John is able to strategically setup a pension payment for approximately $242 per week ($12,584 per year) from his TTR account. This will boost his take home pay back up to $77,216 per year or $1,484 per week. John can withdraw this money from his TTR tax free because he is over age 60.

John’s Net tax savings position of $3,145 does not change. As his take home pay is now the same as it was before. This tax savings is structured within his superannuation and will boost his retirement funds. If John wanted the extra tax savings money to spend immediately. He can increase his pension withdraw payments by $3,145 per year and therefore he can utilise the funds now without changing his superannuation strategy as the only extra withdraw he is making is with the extra tax savings he created. He is not drawing down from his principal balance and other investments.

By determining how John wants to structure his Net tax savings. John would need to carefully determine how much of his super funds he requires to transfer to his TTR account as he needs to follow the 4% minimum, and 10% maximum withdraw requirements for his age. Therefore, if John wanted to keep the tax savings within his super and only withdraw $12,580 per year to match his current take home pay. John would ideally have $179,771 transferred into his TTR account as this allows him to draw down around 7% of his TTR account. This allows a range of buffer if John’s funds were to decrease or increase in value. As the TTR account works just like an accumulation account, it may still be invested as per your desires (depending on your super fund provider). If John has a smaller balance in his super, he can transfer as little as $125,800 into his TTR as by withdrawing the maximum 10% he is still able to meet his requirements of withdrawing $12,580 to match his original take home pay. 

What are the main steps to the Income Swap Strategy?

Depending on your unique situation and whether you have a financial adviser to assist you. There are many ways to implement this type of strategy. However, we will provide the easiest to understand and basic steps to follow.

1.      Contribute to super.

Make the voluntary concessional contribution to your super, either as a personal contribution claimed as a tax deduction or through salary sacrifice. Ensuring you do not go over your concessional contributions cap which is $30,000 for the 24/25 FY (not including any additional un-used concessional contributions from previous years using the carry forward rule).

2.      Open a TTR account.

Assuming you are still working and over the age of 60. You meet a partial condition of release and eligible to open a TTR account where you can start to draw down 4% - 10% of your TTR balance. By this point, you ideally calculate how much you will need to withdraw from your TTR account before transferring any funds over. As your desired withdrawal amount will determine how much you will need in the TTR account.

3.      Withdraw from super.

Withdraw enough funds from your TTR account to supplement the personal contribution or salary sacrificed contributions to super. Ensuring your take home pay stays the same, you will be required to calculate your tax savings to determine how much you will need to withdraw.

If its near the end of the financial year and you want to make the personal contribution to claim as a tax deduction instead but don’t have the available funds sitting around in a personal bank account. You can move Step 1 to the end after withdrawing the funds from super first.

Income Swap Strategy Table Example.

The table below is based on John Doe’s options mentioned in the above examples. Please note, that we are comparing the differences between implementing the Income Swap Strategy as opposed to doing nothing.

Income Swap Strategy Example With Catch-Up Contributions.

In this scenario we will now assume John Doe has $25,000 worth of unused concessional contributions from previous years that he can use by taking advantage of the ‘carry forward rule’. This means that John will be able to contribute even more to super and boost his retirement savings, even further again, without having to sacrifice any of his net take home pay.

Key Takeaways & Other Tips.

It is recommended that you review your TTR account balance and Income Swap Strategy at least once per year to ensure you meet your withdraw requirements along with any changes to your income or employer contributions received (such as an increase in SGC).

If you wish to take advantage of an Income Swap Strategy during the middle of a financial year or towards the end of a financial year. You may have to have access to personal savings to instead make a personal contribution and claim it as a tax deduction instead of opting to use a salary sacrifice agreement. As the salary sacrifice agreement assumes it is established at the start of the financial year. In John’s example if you have the $18,500 as cash in a personal savings account ready to use. You can bypass needing to setup a salary sacrifice agreement and instead make a direct contribution inside super as well as one receiving lump sum annual payment back from the TTR draw down. Please note, that by doing this instead of the salary sacrifice agreement you won’t receive the tax benefit until the end of the financial year when you complete your tax return and update your taxable income.

A downside to this strategy may be that if you are saving up your concessional contributions and to utilise the carry forward rule for a large future capital gain, such as a sale of an investment property, you may want to re-evaluate the benefit of this strategy. As it would have to be calculated on a case-by-case personal basis to determine if its still impactful to do both strategies for any individual or situation.

By implementing the TTR Account & Income Swap Strategy. You will need to ensure you keep your accumulation account open for your existing insurances and contributions (you cannot make contributions into a TTR account).

Some super fund providers will also allow you to do an in-specie transfer when opening a TTR account. This means that you don’t have to sell your investments down to cash before transferring the funds to a different account. It allows you to remain invested in the market when the funds are transferred to your TTR account and therefore not subject to any capital gains tax either.

Final Notes

Apart from the ‘Key Takeaways & Other Tips’ to this strategy. If you are over age 60, you can utilise this Income Swap Strategy to save tax and boost your retirement savings, as it costs nothing but your time and energy to do alone.

However, I strongly recommend hiring a Financial Adviser to assist with the intricate setup required of this complicated strategy, along with yearly reviews to ensure the setup remains relevant as your situation changes.    

Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute financial, tax, or investment advice. We recommend speaking with a qualified financial adviser before making any decisions regarding your superannuation. Every individual’s financial situation is unique, and personalised advice is essential to ensure the best outcome for your specific circumstances.