I AM 57, working full-time with a gross salary of $97,000 a year. I have been salary sacrificing the maximum amount allowable to superannuation (this has been reduced to $50,000 from this financial year) for the past few years and will retire in six or seven years' time. Last July, I commenced an annual transition to retirement (TTR) pension payable in June each year . The taxable and tax-free components are 70/30 respectively. Now I am not sure that a TTR is such a fantastic idea after all. First of all, I have to make the minimum withdrawal from the fund and I still have to pay tax on the taxable component even though I get the 15 per cent offset. Its earnings and capital gains might be tax-free but there is not much earning or capital gains in this economic climate. I am wondering whether I should roll the pension back to the accumulation phase and start it again when I turn 60. M.L.

I agree, it is not a total gift from God! Of your $50,000 salary sacrifice, the first $17,000 a year of salary sacrifice reduces your personal taxable income from $97,000 to $80,000.

This amount thus escapes the 40 per cent tax bracket with an overall tax saving of 25 per cent after the 15 per cent super tax, paid in the fund.

The next $33,000 would fall into the 30 per cent tax bracket and the tax saving is thus 15 per cent. So there is no doubt that salary sacrifice is beneficial. However, if you cannot live on the amount remaining, you either need to reduce your salary sacrifice or take a Transition To Retirement (TTR) pension.

Your TTR pension consists of 70 per cent taxable income and presumably this all falls within the 30 per cent tax bracket. Since you have a 15 per cent tax offset, you are paying a net 15 per cent tax on this 70 per cent and there are no tax savings. However, you are receiving 30 per cent tax-free and, as you mention, the pension fund is untaxed so these represent benefits.

But, as I've mentioned before, there are cases where an untaxed pension fund can actually show lower earnings than an identically invested, taxed, accumulation fund, usually due to the increased costs of operating a pension fund.

A further point is that you are withdrawing a 70:30 mix from your pension fund while your newly salary sacrificed contributions are forming a 100 per cent taxable benefit, which you'll need to try to deal with before age 65 or retirement, whichever is later.

I generally feel that if you can live without a TTR pension it is a simpler proposition to let the money accumulate until you turn 60, when 100 per cent of the superannuation becomes untaxed.

For the grandchildren

I RECENTLY sold a unit in Manly. I wish to invest money for my grandchildren, ages 18 and 15. I do not wish the children to receive the monies until the age of 24. Could you tell me that best way to achieve this without a heavy tax bill. V.D.

Have you considered the children's educational needs? If there are school fees and if they plan to go to university, and possibly live in college, they could use some of the money earlier. Or did you educate your children well and thus, hopefully, they can afford to pay for their children's education?

You are looking to pass the money on in six and nine years, respectively. Unless you want to give the money away now, possibly for Centrelink-related reasons, I'd suggest keeping the money in your name, then giving it to the children at 24, or whenever, while making a note in your will in case you fall off your perch beforehand.

If you want to invest in another name, if one of the children's parents is not working, then you can give the money to him or her, thus minimising tax, on condition they pass it on to the children at the nominated age.

My least-favoured option would be an insurance bond, taxed at 30 per cent a year and only cashable tax-free after 10 years, or a discretionary trust as this would encounter legal and accounting fees when there appears little need.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Helplines: bank ombudsman 1300 780 808; pensions 13 28 00.