Super funds up in arms

SUPER funds have reacted angrily to budget cost-cutting, accusing the government of eroding confidence in the system.

By InvestSMART · 10 May 2012

By InvestSMART ·
10 May 2012

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SUPER funds have reacted angrily to budget cost-cutting, accusing the government of eroding confidence in the system.

They say the budget savings may be less than expected as high earners able to afford sophisticated tax advice look elsewhere.

The government announced in the budget that it would save about $2.4 billion by doubling the tax rate to 30 per cent on concessional contributions for people earning more than $300,000.

It would also defer a special deal that would have allowed older workers with less than $500,000 in super to contribute up to $50,000 a year double the $25,000 for everyone else.

The chief executive of the Association of Superannuation Funds of Australia, Pauline Vamos, said the deferring of this deal would be very disappointing for older workers, particularly women trying to make up for low account balances.

While a small proportion of baby boomers have very healthy super accounts, a recent report by the Australian Centre for Financial Studies found average superannuation balances for men in the workforce aged 58 to 62 was about $210,000 in 2010. For women it was $95,000.

The chief executive of the Institute of Superannuation Trustees, Fiona Reynolds, said: "We need to remember that most older workers have only had the benefit of 9 per cent compulsory super since 2002, and many have seen their retirement savings hit by the global financial crisis."

She said this was the fourth change to the contribution caps since 2006.

There was a real risk that many people would mistakenly contribute too much and be hit with harsh tax penalties, which occurred last time the contribution caps were cut. This year, everyone over 50 can contribute up to $50,000.

Andrea Slattery, chief executive of Self-Managed Super Funds Professionals' Association, said she was concerned that these measures could also be the thin edge of the wedge.

Ms Vamos said reducing the incentives to save in super would erode confidence, and people were losing heart in the system. She said this could lead to a snowball effect, in which less money was invested in the economy through super and future taxpayers would be required to fund a much bigger burden.

She called for a parliamentary inquiry into tax-advantaged investments to ensure the retirement savings system was not being undermined.

What the government saw as one-off revenue measures would encourage some to seek low-taxed investments outside superannuation.

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Frequently Asked Questions about this Article…

What budget changes to superannuation did the government announce?

The budget announced a plan to double the tax on concessional super contributions to 30% for people earning more than $300,000, a measure the government expects will save about $2.4 billion. It also deferred a special deal that would have let older workers with less than $500,000 in super contribute up to $50,000 a year (instead of the standard $25,000).

Who will be affected by the higher 30% tax on concessional contributions?

High‑income earners with taxable income above $300,000 will be hit by the higher 30% tax on concessional contributions. The article notes some of those people may seek sophisticated tax advice or look for lower‑taxed investments outside super, which could reduce the budget savings.

What does deferring the $50,000 contribution option mean for older workers?

Deferring the special $50,000 contribution deal means eligible older workers with less than $500,000 in super will not get that temporary higher cap now. Industry leaders warned this is particularly disappointing for older workers — especially women — who are trying to top up low account balances.

Why are super funds and industry groups upset about the budget measures?

Industry bodies say the changes erode confidence in the retirement savings system. ASFA chief Pauline Vamos warned reduced incentives to save in super could lead to less money invested through super, creating a ‘snowball’ effect where the economy and future taxpayers bear a bigger burden.

How do these changes affect women and people nearing retirement?

The article highlights that many older workers, and women in particular, have much lower average super balances (a 2010 report cited average balances for men aged 58–62 of about $210,000 and for women about $95,000). Industry chiefs said those groups could be disadvantaged by deferring higher contribution opportunities, given many only benefited from 9% compulsory super since 2002 and some saw savings hit by the global financial crisis.

Are contribution caps changing often, and is there a risk of penalties?

Yes — the article says this was the fourth change to contribution caps since 2006. It warns there is a real risk people might mistakenly contribute too much and face harsh tax penalties, as happened after previous cap cuts.

What have industry leaders recommended in response to the budget measures?

Industry leaders have been vocal: ASFA’s Pauline Vamos called for a parliamentary inquiry into tax‑advantaged investments to ensure the retirement system isn’t undermined. Other leaders, including Fiona Reynolds (Institute of Superannuation Trustees) and Andrea Slattery (SMSF Professionals’ Association), warned about the impact on older workers and the potential for these measures to be the ‘thin edge of the wedge.’

What practical steps are being suggested for everyday investors in light of these changes?

The article indicates experts expect people to seek tax advice and to be careful about contribution limits because of the risk of penalties. It highlights the need to be aware of current caps (for example, this year everyone over 50 could contribute up to $50,000) and to pay attention to policy changes that affect long‑term retirement savings.