Treasury hones attack on super

It’s a worn record but it keeps playing and playing.  I am talking about the traditional attacks on superannuation that people in Canberra love to muster. 

You have to remember that senior Treasury people have access to bonanza defined benefit schemes and can’t really understand what superannuation is really about for the great masses.  And that is why they make so many mistakes. 

Unfortunately we had an inexperienced minister in Arthur Sinodinos who has been  under considerable personal pressure. Sensing an opportunity Treasury is now leaking their wish list so let’s look at what they want to do, and attempt to establish what might happen and what the timetable might be. Then we will look at what your own strategy should be.  It is a big ask but let’s have a try.

There are three areas that Treasury want to attack.

1. they want the aged pension to cut in at a much older age, and make it very difficult to access the aged pension if you have an expensive house or if you have large amounts in superannuation. The limits to pension entitlements are already covered in terms of non-residential house assets—the so called ‘means’ test.
2. they want to make it much harder for people with superannuation in pension mode to access lump sums. But such a policy shift would greatly reduce the flexibility and attraction of superannuation to many people.
3. and finally, of course, they want to tax superannuation pensions or the income in superannuation that provides pensions. (Currently, if you are aged over 60 and your superannuation fund is in pension mode, the fund pays no tax on its income and the pension itself is also tax-free). 

As I pointed out last week for those investing substantial sums in superannuation and who are not planning to use the aged pension, the first of these attacks is not all that relevant. 

And again limiting lump sums are not relevant if you are planning to live on your superannuation and don’t need a major payment.  But that’s probably a minority. 

Of course for those people living off a superannuation funded pension, taxing superannuation funds or pensions will be an almighty blow because that effectively reduces your income by 15 per cent (assuming that is the tax rate used).

Repeated super attacks a turn-off

These repeated attacks turn a lot of people off superannuation, and say they should never go into it. 

As I pointed out last week: if the bottom line is that there is a 15 per cent tax on all funds and restrictions on lump sums, then it doesn’t necessarily mean that superannuation is a bad investment. Although for those that have only a small amount in superannuation and plan to use the aged pension to supplement it, there could be some nasties. 

Treasury loose with the truth

Treasury are extremely loose with the truth when it comes to superannuation.  You’ll remember that last year they produced a report on the cost of superannuation which had two separate figures and the preparer of those figures said that they shouldn’t be added. But Treasury  ignored the instruction and added them up and so claimed that the cost of  ‘subsidising’ superannuation  was some $60billion.

It was nothing like that. And when it was clear that Treasury was producing false statements, the ALP government of the day was forced to use other figures to prepare policy. 

Now, Treasury produces the two figures separately and doesn’t add them up but they have withdrawn the warning that they must not be added up. And so the newspapers simply add them up and repeat the falsehood that superannuation costs $60billion. Again it is deliberate misleading by public servants hoping to trick gullible ministers and the public. And Treasury refuses to calculate the benefit that superannuation carries in reducing the burden for the aged pension.

When you write about superannuation you almost certainly come at it from the point of view of your own experience and as Eureka readers well know I have worthwhile investments in superannuation and don’t use the aged pension. 

That means that if there is going to be a tax on superannuation income or pensions then I lose out. But having said that, I feel vulnerable to attack because my superannuation pension is tax-free and doesn’t affect my non-superannuation earnings.

Lifting the pension age to 70

So let’s look at what Treasury is leaking. They want to raise the government pension age to 70-years - from the 67-years set by the ALP government. 

And they want to tighten the income assets test including the family home. 

And they want retirees to use their existing assets before they go on the aged pension. I think that it is likely that the aged limit will rise to 70 over time and that there will be some form of limit of how much pension you can draw if you have a million dollar house. But trying to make you spend your savings before you get your government pension would be political suicide. 

Treasury’s tax plans for super

When it comes to private superannuation what Treasury want is a flat tax on all investment earnings across super including pension accounts and presumably that will be at 15 per cent although for a pension it might be a lesser figure. 

You will remember that I was criticised for letting the previous government off the hook in its plan that required the first $200,000 income of a superannuation fund to be tax-free for those in pension mode and that income above $200,000 would be taxed at 15 per cent. Arthur Sinodinos knocked this out saying that it was too complex. I don’t think it was really that complex  but that is another story.  I was delighted of course by his action, but the problem was that the ALP tax was one we could live with. Now Treasury is coming back with a more draconian approach, which was always my great fear. 

If some of Treasury’s wishes are granted, it will substantially reduce your superannuation income at a time of low interest rates. This would be a very nasty situation and I think the political pressure on the government would be enormous, particularly when they said they would not change superannuation substantially in this term of parliament.

Treasury’s plans for lump sums

The final proposed Treasury attack might surprise everyone. 

Treasury want to require retirees to set aside all or part of their superannuation funds to retirement income. In other words, limited or no lump sums. That is the sort of thing I can see coming in very easily because some people are spending these lump sums to access the government  pension.

I know a great many Eureka readers have invested in superannuation and have mortgages or other commitments, for which they want to access lump sums. Others  - like myself - are simply using superannuation as an income stream, and so would not be affected by lump sum clampdown. The government wants to use superannuation to fund infrastructure and restricting lump sums might be part of that effort. 

At the recent infrastructure summit in Sydney a detailed proposal got put on the table to tailor infrastructure projects so that individual self-managed funds could invest in them, rather than being forced to rely on institutional syndicates and pay high fees.  I think this has a very good chance of getting up and will certainly help superannuation funds get higher rates of return on their interest bearing securities. The trick will be to make sure the income streams are secure and not vulnerable if one or two of the projects fall over. 

Similarly, restricting aged pension to people who have homes worth less than say a million dollars is again something that could easily take place in this environment.

So what to do if you want to take out a lump sum?

So if you are planning a lump sum distribution and are eligible to do it now,  then I think I would at least consider take the opportunity before the budget. I am not claiming I have inside knowledge on this - it is just that is clearly on the government agenda, and I am trying to be safe. If nothing happens you will say I got it wrong, but this is about risk. (Remember that providing you work for 40 hours in a 30-day period in 2014-15,  your superannuation  can pay out a lump sum, then in most instances you can reinvest the up to $215,000 back into superannuation.  So you are not locked out once you take the lump sum.) 

But finally what a dreadful mess we find ourselves in. We have one of the best superannuation schemes in the world, but because it was introduced in opposition to Treasury they have done nothing but attack it all the way through using both sides of parliament. But do not despair, Tony Abbott made clear promises on superannuation and he is well aware of what happens when you breach promises from the way he exploited the carbon tax. So my guess is that we will have an election debate about it and the vulnerability of superannuation will depend to some extent on the level of support the government has at the time of the election.