This week's post starts with an article sent in by a member. The Australian article (Outdated income rules are in need of an overhaul) was written by Tony Negline, a well-known media commentator on superannuation. The issue at hand - the minimum pension rules - is one we've covered in recent articles and which many members have strong views on, so I thought it would make for an interesting discussion.
To kick the discussion off, let me say that I agree with Tony's conclusion: the minimum pension rules need updating. The current rules are inflexible and were written by someone who's never run a self-managed super fund. Having to make a minimum payment year in, year out, doesn't allow for the practicalities of variable returns and changing levels of expenditure. The current rules also don't cater for the person who wants to conservatively estimate both their future returns and their life expectancy. Whilst withdrawn super may remain tax-free (held in the individual's name) for many years and decades, we should respect the fact that not everyone wants to have their future income and expenditure based on the forecasts of a bunch of actuaries they've never met.
But I disagree with Tony's view on the extent of the problem. As highlighted in Longevity and super withdrawal rates - Part 1, for most people, having to hold assets in their own name isn't going to give them a tax bill for many years, or decades, and there are some significant advantages to doing so (for instance, not being subject to minimum withdrawal rules or future law changes). The 'problem' he identifies might be a problem for some, but it's not a problem per se.
The article also opens up an interesting philosophical point which I'm not sure has ever been settled (and perhaps should be). Is it age, working status or the taking of a pension (ie withdrawing previously taxed capital) which our society has agreed should entitle a person to a 'tax free' result?
You see, the existing system doesn't actually require anyone to make withdrawals; if you don't want to take anything out you can just keep your super (or part thereof) in 'accumulation' (paying tax at 15%).
Whilst there's constant mention in the media of 'tax-free super for the over-60s' it's not actually turning 60 which triggers the right to 'tax-free'. Being aged 60 makes you eligible, but you trigger the tax-free status by retiring and taking a pension (and subjecting yourself to the minimum withdrawal rules).
Now I'm not saying the rules don't need changing (as I said above, I think they do). But to the extent what they are doing is preventing people accumulating at a zero tax rate, then this is possibly exactly what is intended and simply presents retirees with the choice of whether to withdraw or accumulate (with the associated tax consequences). Since the intention is unclear, it's hard to know whether this is the 'right' or 'wrong' result.
So, before changing the minimum pension rules, first step for the policymakers should be to determined what it is that is to be 'tax free'. Is it super withdrawals, the income of the over-60s or something else altogether?