Another raid on the super honeypot?

The past week has seen two interesting developments on the retirement savings front.

Firstly, the Financial Services Council released a report highlighting a $1 trillion shortfall in our national retirement savings. Some commentators are suggesting that it might finally be time to raise the official 'retirement age' to help minimize this shortfall. Others are calling for a ban on lump sum super payouts.

It is hard to argue with the basic logic of these suggestions and the Financial Review reported (over the weekend and early in the week) that the Government is rumoured to be considering more changes to superannuation, with a particular focus on SMSFs.

The bad (although not unexpected) news is that structural reform is not on the agenda. Bill Shorten apparently believes the increase in compulsory super to 12pc will fix the shortfall problem, although exactly how remains a mystery.

What is on the agenda (according to the AFR) is another dip into the 'super honey pot'. There's bills to pay and longevity induced savings shortfalls are well and truly someone else's future political problem.

In 'SMSF investing: The hidden dangers' we warned of the potential for more adverse super law changes, but we didn't think it would happen this quickly. Unfortunately, when a chunk of the Federal revenue stream is a leveraged commodity price play, things can change at a rapid pace. If the AFR reports are true, it makes it crystal clear that super is, and will continue to be, the backstop for Federal Budget woes. It is an unfortunate fact of life that politicians (of all persuasion) generally prefer to raise cash now and defer problems to the future. In this context super is a sitting duck.

Fortunately it is not all doom and gloom. Firstly, there is a limit to any negative changes. Super will continue to provide a benefit. Politicians may take a nibble here and there to balance the books but it is unlikely they could ever wreck it completely. The key takeaway for super investors is not to avoid super but simply not to put yourself in a position where you are relying on super rules (and tax rates) staying where they are.

The current targets seem to be SMSF Transition to Retirement strategies, SMSFs with large balances and, possibly, property investment.

To some degree you could argue changes to TTR strategies are fair enough. The Government probably never factored in the extent to which you could be making concessional (deductible) contributions and drawing a lowly taxed pension. But, given the lower caps on contributions, the benefit of this strategy has already been reduced.

Also, many people will have factored TTRs into their super strategies. They may, for instance, have paid down debt in previous years, rather than making super contributions. This is not an area that should be tinkered with lightly and certainly not as a budget quick fix.

Large balances are going to be harder to defend. It wouldn't be at all surprising to see them get hit in some way shape or form. If you have a balance over $5m you might want to start budgeting on a higher tax rate going forward.  As industry and retail funds like to bleat about 'system issues' there is every chance this rule might just hit SMSFs rather than large super balances generally. Industry Super Fund anyone?

The property investment angle is an interesting one, especially as the supposed focus is the capital gains tax rate. Fortunately for SMSF property investors, the CGT rate is not a major contributor to overall after-tax returns. Other changes being called for by super experts (for instance, removal of negative gearing) or some sort of prohibition on current property strategies would be much more damaging financially.

We will keep an eye on this last issue and report on the implications in a future article.

In the meantime we await to see whether the AFR reports come to fruition and exactly what form of the latest dip into the super honeypot will take.