Transition-to-retirement strategies have become popular with financial planners for people 55 or older with a reasonable amount in retirement savings. But the halving of the super contributions caps has made TTR strategies less effective.

The strategy can still be a good one but pre-retirees have to go into it with their eyes open. The projected benefits put out by the banks and insurers, who own most of the financial planning groups, usually do not show the costs of the strategy. For those younger than 60 on average incomes, the costs could outweigh the benefits.

Under the new limits introduced from July 1 last year, the maximum amount of pre-tax income (concessional contributions) that can be made to super was halved from $100,000 to $50,000 for over-50s and from $50,000 to $25,000 for under-50s. From July 1, 2012, the over-50s cap will reduce to $25,000 to match the under-50s cap. These caps include the 9 per cent superannuation guarantee that employers pay.

So someone 50 or older earning $100,000 can make a pre-tax contribution of up to $41,000 and, from July 1, 2012, up to $16,000. The attraction of the TTR strategy is the tax savings but if pre-retirees aren't careful the costs of implementing the strategy can whittle away those savings.

Anyone who is at least 55 but under 65, even if they are working full-time, can start a TTR pension. The pension was introduced by the Howard government to help workers transition into retirement but has now become almost the standard strategy of financial planners with their pre-retiree clients.

The idea is to swap the income tax that would have been paid on salary for the 15 per cent tax that applies on super contributions. The amount of salary being sacrificed and the amount taken out of the pension are calculated so the pre-retiree's after-tax income remains the same. Meanwhile, tax savings boost the retirement nest egg by more than if the strategy had not been used.

But the lower contribution caps make it not nearly as tax-effective as it was.

Take an example provided by Mammoth Financial. Jackson is 55, earns $80,000 a year, has $300,000 in super and plans to retire at 65. He salary sacrifices $35,000 a year in a TTR pension. The maximum amount he can salary sacrifice reduces to $16,000 from July 1, 2012, when the cap on contributions is slated to match that for under-50s. The cap includes the employer's 9 per cent contribution.

Jackson receives the same after-tax income as before. Using standard assumptions on inflation and investment returns, Jackson's account balance increases to $762,000 by the time he reaches 65 using the TTR strategy compared with $690,000 without it - a difference of $72,000. The difference would have been almost twice as much under the old caps.

This takes no account of the fees and commissions or the costs of the super fund and the underlying investments.

The principal of Mammoth Financial, Alex Morris, says while the strategy can be worthwhile, it is not suitable for everyone. Some employers do not offer salary sacrifice to employees. Of those that do, some calculate the 9 per cent super on the salary after salary sacrifice, which they are legally entitled to do.

Morris says a super balance of at least $200,000 is needed. The maximum that can be drawn from the pension each year is 10 per cent of the balance. And most pre-retirees would want to draw at least $20,000 a year to cover the lost income from salary sacrificing and to make the costs of the strategy worthwhile.

A TTR strategy requires moving most of the savings from the accumulation fund to the provider's pension fund, or to another provider's pension fund if the provider does not have a suitable pension product. A director of Strategy Steps, Louise Biti, says pre-retirees have to be mindful of the entry and exit fees.

The co-founder of researcher Chant West, Warren Chant, says some providers charge higher fees on their pension products than their super products.

As an adviser will be needed for the TTR strategy, the planner's remuneration will have to be factored into the total costs when assessing the strategy.

Financial planners are increasingly offering to rebate commissions to investors in return for charging clients fees. The planner's employer may favour a limited selection of pension funds that may have higher costs than the pension fund of the pre-retiree's existing provider.

Other options

The halving of super caps on contributions has hindered the plans of high-earning pre-retirees expecting to make up retirement savings in the last years of work.

A director of Strategy Steps, Louise Biti, says most of the benefits of a TTR strategy occur from 60, when the pension income can be drawn tax-free. Between 55 and 60, those with big balances and high incomes benefit most.

Under-60s on average earnings may be better off salary-sacrificing as much as they can rather than incurring the extra costs of a TTR strategy.

While concessional caps on pre-tax contributions to super have been halved, there is also a non-concessional cap. Under-65s can contribute $450,000 from after-tax pay into super in a rolling three-year period. All the caps are indexed. The caps will rise in $5000 lots with wages growth.

The caps mean high-income earners should start salary-sacrificing well before they cease full-time employment.

The head of wealth management at HLB Mann Judd in Sydney, Michael Hutton, says that for a couple, the first move is to maximise deductible (before-tax) contributions. Then he suggests they start making non-concessional (after-tax) contributions. "Ideally, you should structure your affairs so that each spouse can put in the maximum concessional contributions first."

There is no initial tax benefit from non-concessional contributions but once inside super, only 15 per cent tax is paid on earnings and 10 per cent on capital gains.

"If one spouse has a higher income than the other, the higher earner should be boosting the lower earner's super with non-concessional contributions."

Another strategy Hutton uses is to put non-super investments into the name of the lower-earning spouse, thereby increasing the lower earner's taxable income.