Changing the super changes mentality

Change has been the one constant factor in Australia's superannuation landscape, but there is one looming change that should be beneficial to all.

The federal government announced in its latest budget that it plans to establish a Council of Superannuation Guardians – a move that will effectively take superannuation policy out of the hands of politicians.

What if we could get a broad framework, agreed on by both sides of politics, and then lock that in? Change from that point would have to be run through a board of apolitical “guardians” (to use Labor’s terminology).

To that end, the Association of Superannuation Funds of Australia has made a fist of what a bilateral base super policy might look like, with a recent research white paper.

(ASFA’s timing also stunk, so we missed it at first pass. It released in the two-day gap between the federal budget and the opposition’s response.)

It puts forward some very interesting propositions. Eureka Report readers won’t like all of it. But, as a rough statement, it sits somewhere between the old and the new – the current government’s restrictions and the previous government’s largesse.

ASFA’s Super System Evolution: Achieving Consensus Through a Shared Vision deals with the three stages of super: accumulation; transition and “after age pension age”.

Accumulation stage recommendations

It recommends that compulsory super contributions be broadly extended to cover the self-employed, independent contractors (such as taxi drivers) and domestic carers, employees earning less than $450 a month and individuals who are receiving paid parental leave from the government.

Most of those wouldn’t be too difficult. But ASFA accepts forcing the self-employed to contribute to super would be tough.

“In the case of the self-employed, contractors and the like, this could involve using taxation powers to require such individuals to make contributions following the lodging of their tax returns”. That definition would mean that contributions are not made in the year of income.

ASFA, along with the rest of the superannuation industry, wants to see the Superannuation Guarantee rate rise to 15%. Given the politics being played over raising it from 9% to 12%, you can assume that will take some time.

The industry group also notes that the rules surrounding the release of super funds on “hardship and compassionate” grounds are both administratively burdensome and lead to lower retirement savings. There is also evidence that lenders are exploiting the rules, knowing that customers can get their hands on sums from super when loans are near default.

It dismisses taxing super based on marginal tax rates and recommends the continuation of the 15% income tax level for super.

ASFA again raises the concept of “lifetime” contributions caps, rather than on an annual basis, “in order to accommodate the fact that individuals will generally have markedly different capacity to make contributions in specific years of their working life”.

“Provisions should also be in place which allow individuals with low balances to catch up when they have the financial capacity to do so.”

I have previously written about “rolling average” contribution levels and “lifetime limits” as a potential solution here (A fix for super limits). Small business people, in particular, have years where contributing to super at all would cause extreme hardship. But the use-it-or-lose-it nature of the current concessional contributions caps are inherently unfair.

Contributions averaged over five years, or lifetime limits, would add fairness rather than take it away, particularly to those whose income is not consistent.

Ok so far. Now for a contentious recommendation. For those angered by Labor’s plan to tax pension income above $100,000 a year ... divert your eyes away now.

“Some upper limit on retirement savings attracting ongoing tax concessions is appropriate. If a lifetime limit on the amount attracting tax concessions is introduced, ASFA proposes that the limit should be in the order of $2.5 million in today’s dollars.”

Its reasoning for that figure is based on the fairly widely accepted belief that 60% of pre-retirement income is what most people need in retirement. Therefore, a person earning $200,000 a year prior to retirement would need around $120,000.

ASFA notes that the old Reasonable Benefits Limit – which did not include non-concessional contributions – would be around $1.75 million if still in existence today.

Superannuation savings at $2.5 million would provide an indexed income of $98,880 from age 60 to 95, or $113,785 from age 65 to 90.

This isn’t far above the theoretical limit of $2 million that the government set recently for its plan to tax income inside an individual’s super fund above $100,000 a year.

Transition to retirement stage

Currently, Australians can access their superannuation from age 55 if they were born before mid-1960. This is being phased up to age 60 for those born after mid-1964, which will occur by 2024.

ASFA wants to see that minimum age for access to superannuation pegged at five years below the age pension age limit. That’s currently 65. However, that is being phased up to 67 and anyone born from 1957 onwards will not be able to qualify for the government age pension until they are 67.

They also want to see strict limits applied to lump sums being paid during this phase. Anything more than two to three times the national average wage should be taxed more heavily to encourage people to leave money in super and take an income stream instead.

Lump sums taken in excess of that amount should be taxed at 30%, ASFA suggests, with exceptions for lump sums for entering aged care facilities.

After age pension age

A major problem is too many people blowing their super too fast, and ending up back on the government age pension. Worse, research exists that says Australians will increase spending and debt prior to retirement, specifically because they’re aware they will soon be able to access a lump sum from super. They are simply bringing forward spending.

ASFA wants further restrictions placed on access to lump sums in actual retirement. They want it to be about income streams. However they realise that some access to capital might be required. “For instance, it might be desirable for a modest capital sum to be available on favourable taxation terms at the time of retirement to cover capital costs of new domestic appliances, a car or paying off the residual balance of a home loan.”

Again, lump sums should be restricted to two to three times the average wage. Anything over that should be taxed at 15% – less than if taken out during the TTR stage.

ASFA also said it wanted to start pensions by default for those who reach age pension age. It wants blockages to building a thriving annuities sector in Australia removed.

While SG payment restrictions should be completely abandoned for employees, ASFA recommends that the ability to make other concessional and non-concessional contributions be stopped when a person reaches five years beyond the government age pension age.

More than anything else, when it comes to superannuation we want stability and certainty. A set of rules that don’t change every year, or every time the Commonwealth’s budgetary position feels a little draughty, or every time a government changes.

The Labor government announced plans for a Council of Superannuation Custodians in April. The timing suggested trying to lock in changes it had made that it believed were fair and should continue. That’s not something you do in the final months of a term of government.

To save for retirement, people want consistency. There is no doubt that the non-super investment rules change far less frequently than super investment rules.

I believe most people would settle for something slightly less generous than the average of the last decade, but with less likelihood of constant change. Certainty provides confidence. Confidence for investment decisions. Confidence for contribution planning. Confidence for retirement planning.

ASFA’s white paper is a long way from perfect. But, at a time, when people are desperate for the change to ... just ... stop ... it’s a reasonable starting point for a discussion, without the shrill spin attached to the political debate.

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

• Self-managed super fund (SMSF) assets increased by $22 billion in the three months to March, according to the Australian Prudential Regulation Authority’s (APRA) quarterly superannuation statistics. SMSFs held the largest proportion of superannuation assets as at March 31, accounting for 31.5% of the total $1.58 trillion superannuation pool. This was followed by retail funds with 26.3%, industry funds with 19.8%, public sector funds with 15.7%, and corporate funds with 3.8%, while small APRA funds held 0.1% of total assets.
• Life insurer NobleOak is preparing to launch a new product next month aimed at the SMSF sector. SMSF Direct Life will be sold through credit unions and non-bank lenders, according to media reports, and will provide flexible life cover for those managing their own DIY super funds.
• The SMSF Professionals’ Association of Australia (SPAA) has lent its support to the government’s plan to increase the concessional contributions cap for those 60 and older from July 1 and for anyone 50 and older from July 1, 2014. Graeme Colley, SPAA’s head of Technical and Professional Standards welcomed the move. “We advocated an increase in concessional contributions after the cap was reduced in the 2009 Federal budget, knowing how important it is for people nearing the end of their working lives and wanting an adequate sum in retirement,” Colley said.