A super dream put to rest

Forget about higher concessional contribution limits … you’re just dreaming.

Summary: The federal government, via Treasurer Joe Hockey, has made it clear that any further superannuation tax breaks are not economically sustainable. That puts an end to any hopes of larger concessional contribution allowances. But the increased contribution limits already announced will stay in place.
Key take-out: Don’t expect any superannuation changes in this federal budget, but there will be some big changes to superannuation further down the track. It’s never too early to plan to beat them but, remember, super will always lead to a better tax outcome than non-super monies.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

It’s time to declare at least one superannuation dream dead. It’s been in a coma for a while. But Treasurer Joe Hockey has finally put an end to it.

If any of you were holding on to even a glimmer of hope that we will see a return to structurally larger concessional contribution limits ... you can forget about it.

Outside of inflation-linked increases to concessional contribution limits, there will be no return to concessional contribution limits of $50,000 or $100,000. Never. (In politics, of course, that means in the current term.)

Hockey, in a speech last Wednesday, backed up by radio interviews on Thursday, made it crystal clear that the Coalition government is of the opinion that superannuation tax breaks cannot be made more generous than they currently are.

While he didn’t state it, it seemed pretty clear he had formed the opinion that super concessions might have to be wound back at some stage. Yet this wouldn’t occur in a first term of government, as that would break an election promise.

The upcoming budget – now two weeks away – is going to launch a conversation about the affordability of retirement income streams, predominantly superannuation and the government age pension.

“We said we’re not going to have any adverse decisions in relation to superannuation in our first term. But clearly, as we have the proper debate about the ageing of the population, we need to look at the role of superannuation and the preservation age and that’s something that the ... Financial System Inquiry is looking at, and will look at in the context of the decisions we make in the budget, but also the Intergenerational Report that comes out,” the Treasurer said.

Hockey quoted a number of statistics in his speech and the subsequent interviews.

The one that sticks out to me is this: the number of retirees who currently receive the government age pension (at least a part pension) is 80%. In 2050 (when the compulsory superannuation system that started in 1992 will be mature), the number of people expected to receive at least a part pension is still expected to be 80%.

Hockey is pointing out two things here. First, he believes too high a percentage of older Australians are getting the age pension. Perhaps he believes only 50-60% should get it at all. Second, he also thinks superannuation concessions aren’t working properly, or are too generous to be sustainable.

So, in the long term, fewer people will receive the age pension and tax concessions for super will be fundamentally restructured.

Specifically, what’s likely to happen.

  • The age pension will rise from the current 65, to the already scheduled 67 (in 2023), and onwards to 70.
  • Access to the government age pension will be tougher. The government believes that too many people with $1 million in net assets receive a part pension.
  • Super concessions will become more generous for lower income earners to encourage them to save through super.
  • Higher income earners will get nothing. Or worse, the benefits they get from super might go backwards.
  • The preservation age for super also will increase, probably to 65, from the current 55-60 (see below).
  • Annuities could become compulsory to stop the big spend (see my column, Living today, paying tomorrow: A super dilemma).

Preservation age increase

Those born before June 30, 1960 have a preservation age of 55 – that is, the age at which they can begin to access their super.

Those born between July 1, 1960 and June 30, 1961 have a preservation age of 56. It increases one year for each year from there. Anyone born on or after July 1, 1964 has a preservation age of 60.

However, this is likely to increase. Some have suggested that the preservation age be tied to the age pension age. For example, as the age pension age increases, the preservation age is in lock-step, five years behind.

This would mean that when the age pension qualification increases to 67 in 2023, the preservation age would automatically increase to 62 (if five years was chosen as the automatic gap). An increase to 70 for the age pension could see the preservation age increase to 65.

Those who are currently 55 can access their super now (either as a full pension or a transition-to-retirement pension). However, they have to wait another 10 years before they can access a government age pension.

The lift in the preservation age to 60 will mean the “wait” from accessing super to accessing a pension will decrease from 10 years to five years. However, the lift in pension age from 65 to 67 will then increase the wait back up from five years to seven years.

So, over the next decade, the gap between preservation age and pension age will go from 10 to five to seven years. This is likely to be pegged, possibly at five years, which will mean an increase to the preservation age.

So, what do you do?

Every time a major threat to super emerges, the panic sets in. “Will it still be worthwhile putting money into super?”, is the inevitable concern.

The answer will be a resounding “yes”. Super will always be a more tax-effective solution for retirement savings than any other investment vehicle. It needs to be more attractive, or why would people use it?

It’s just a matter of how much more generous it is. If it’s too generous, governments will reduce the benefits.

So, what do you do now?

Firstly, nothing major is likely to come out of the upcoming budget in regards to super. The Abbott Government made promises about superannuation and Joe Hockey has been at pains to reiterate that those promises will be kept. The major changes they have made I went through in this column (Super changes: Preparing for the expected). But they all relate to the first term of government.

There are no promises for the second term of government. “In relation to many of the structural changes that we have to make, the Australian people (will) have the opportunity to make decisions at the next election,” Hockey said.

Make the most of the current contribution rules. Get in up to your concessional contribution limit whenever you can. That’s $35,000 for the over-60s for FY14 and $25,000 for everyone else. Next year, the $35,000 limit applies to anyone over 50, while the rest will have a limit of $30,000.

Consider getting more non-concessional contributions into super. These limits are rising to $180,000 from July 1, 2014.

The most important part of the game is still to get your investment strategies right. You need to be taking appropriate risks in your superannuation.

Never lose sight of two things: the length of time that you are investing your super for, and that super will always lead to a better tax outcome than non-super monies.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au
Graph for A super dream put to rest

  • The SMSF Professionals’ Association of Australia has cautioned that adjusting the pension age requires care and a measured debate. The association believes that lifting the pension age is no ‘silver bullet’, as those who have labour-intensive jobs may need to access social security benefits to survive.
  • Australians in superannuation funds are paying three times more in fees than they should, according to a new study by the Grattan Institute. The study found Australians pay 1.2% per annum in fees, three times the OECD’s average rate, and that if fees were reduced by around 50%, super fund holders would save $10 billion.
  • Demand for independent property research from financial advisers has heated up due to the increasing interest in SMSFs, according to Nyko Property. The research house, which focuses only on investment properties in Melbourne, says it has seen a surge in sales largely in response to regulatory changes through Future of Financial Advice reforms.

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