Franking change will spur pension blowout: Plato

Summary: A high percentage of investors expect any change to franking credits would result in more people becoming reliant on the age pension.

Key take-out: 81 per cent of respondents say they will change their asset allocations if they lost their tax credits.

A survey of investors has found the Australian Labor Party’s proposed changes to Australia’s dividend imputation system would result in nearly half (44 per cent) of respondents expecting to be more reliant on the aged pension.

Increased dependency on the Government’s aged pension would mean a reduction in the savings the ALP estimates its proposed policy would achieve, according to funds manager Plato Investment Management.

The survey, undertaken by Plato in October, found 92 per cent of respondents believe the proposed policy will reduce the incentive to save for retirement.

Managing Director, Don Hamson, says the majority of the 1400-plus respondents (93 per cent) believe they will lose franking credits if the ALP wins the next election and proceeds with the current version of its proposed policy.

Of the 86 per cent who know roughly how much franking credit tax refund they currently receive, more than half (56 per cent) get over $10,000 a year, while a quarter receive $5,000 to $10,000.

“97 per cent of respondents think the changes are unfair, with 93 per cent saying very unfair,” Hamson says. “The vast majority of the people we surveyed – 93 per cent – think their stress levels will rise as a result of the financial impact the proposed changes will have on them. Some 92 per cent think the Australian retirement system will be more complex than it already is.”

Likely portfolio shifts

The proposed policy could also prompt many pension phase investors to change their asset allocation, with a preference for investing in global stocks – taking money out of Australia and Australian companies.

“81 per cent of respondents said they will change their asset allocation if they lose their franking tax refund, with 46 per cent of these allocating in favour of global shares – taking their money out of the local equities market,” Hamson says.

Plato has warned that the proposed policy may impact more retirees and superannuation funds than anticipated, and according to Hamson, there are viable alternatives to the proposal.

“70 per cent of respondents think the $1.6 million cap on super is sufficient to fix the problem of there being a few extremely large franking credit refunds, with 61 per cent selecting this as the best alternative to the proposed policy,” he says.

“Given a choice between the proposed policy, having a cap on refunds of $10,000 or $15,000 a person; or a limit on super (in addition to the $1.6m pension cap) – the super limit wins hands down at 61 per cent,” Hamson says.

The survey results will form part of Plato’s submission to the Standing Committee on Economics’ “Inquiry into the implications of removing refundable franking credits”. 

The Plato survey received over 1400 responses, 76 per cent of these individual investors, 69 per cent retirees and 15 per cent expecting to retire within five years. Almost two-thirds of respondents (64 per cent) invest through self-managed super funds, while 22 per cent invest directly.