There are few more important issues facing retirees than potential changes to superannuation policies. They affect whether it is worthwhile putting more money into super, and even whether to take money out to avoid adverse consequences. Unfortunately, when the Prime Minister contradicts the Treasurer and Assistant Treasurer, it’s difficult to know what to expect and when.
Cuffelinks has no political agenda, but despite repeated comments from Tony Abbott that there would be no adverse changes to superannuation in this term or the next (if re-elected), there is no doubt such amendments are on the minds of the Treasurer and Assistant Treasurer.
For example:
• Joe Hockey told the ABC’s Q&A programme on 25 May 2015 that he does not say ‘never ever’ to anything in politics, and “At some point, and now is not the time, and it won’t be for a while, but at some point we have to look at the future of the entire retirement income system.’’ Plus when he released the Tax White Paper on 30 March 2015, he noted the Paper queried “the appropriateness of superannuation concessions”. .
• As we noted here, the Assistant Treasurer, Josh Frydenberg, told the Sustainable Retirement Incomes Forum last week: “The Government will, of course, consider good ideas put forward as part of the Tax White Paper process and any changes recommended by that process will be taken to the Australian people at the next election.”
Change is coming. In selecting from the claims and counter-claims, those which are written down and considered in painstakingly-prepared speeches must be the most credible, rather than door stops or off-the-cuff responses in the heat of Parliament or a television programme.
For these, we go to Frydenberg’s speech and the content of the Tax White Paper, especially Section 4 on Savings. These suggest a tightening of super concessions will come, at the latest by the next election.
Consider the evidence:
The ‘good ideas’ in the Tax White Paper
Here are some of the good ideas in the Tax White Paper (the bolding is my emphasis):
“The flat rate of tax on superannuation contributions means that most high income people receive a larger tax concession, relative to their marginal tax rate, than low income people. The same is true during the accumulation phase and even more so during the retirement phase when there is no tax on earnings.”
“The different rates of tax on earnings in the pre- and post-retirement phases add costs to the operation of the superannuation system. They also give rise to tax planning opportunities that are usually more accessible to high income earners.”
“With Australia’s ageing population, more individuals will enter the retirement phase where no tax is paid on earnings in superannuation funds. This will put pressure on the long-term sustainability of the superannuation tax arrangements, particularly given other long-term budgetary pressures as the population ages, such as calls for higher spending on health and aged care, and relatively lower revenue from personal income taxes.”
“Individuals and entities willing to engage with complexity in the tax system can structure their affairs so as to minimise their tax liability. This can involve using different legal forms or structures to take advantage of opportunities presented by concessions or gaps in the structure of the law.”
“Confidence in the tax system can be eroded when people think others are not paying their fair share of tax. This can be due to concerns over concessions, aggressive tax avoidance or tax evasion activities.”
“Higher-income earners tend to be more capable of taking advantage of more favourable tax treatments (like superannuation), while those with the lowest ability to pay tend to save more in the more heavily taxed vehicles (such as bank accounts).”
These are the pointers that suggest a response to the White Paper will include addressing concessions for high income earners.
The ‘White Paper process’ is not only the White Paper itself, but the responses, many of which criticise the concessions to high income earners. This question is asked in the White Paper: “How appropriate are the tax arrangements for superannuation in terms of their fairness and complexity? How could they be improved?”
Notable among submissions already made public is from ASFA, the Association of Superannuation Funds of Australia, the industry body representing major funds, which states:
“ASFA is recommending that a limit of $2.5 million be placed on the superannuation funds an individual can rollover to commence an income stream in retirement. Amounts above this ceiling must remain in the accumulation phase and continue to attract the nominal earnings tax of 15 per cent or be removed from superannuation. Non-concessional contributions should also be capped at $1 million over a lifetime to prevent very large balances from accruing in the future as an integrity measure to complement the $2.5 million capital cap.”
Superannuation is an income system, not a savings system
There has been a distinct change in the messages around superannuation since the publication of the Financial System Inquiry Final Report, driven by David Murray’s incredibly simple idea that superannuation should have an objective. And what is the most likely objective? As Murray told the same Forum last week, “We felt the system could only progress based on an income in retirement. Some people say it should be a retirement savings system. They’re not the same thing.”
This puts everyone accumulating their millions into superannuation on notice that super is not meant to be a wealth accumulation vehicle for passing money to the next generation. Does Frydenberg support this? You bet:
“What it is really getting at is that the tax concessions provided for superannuation are intended to encourage and support an individual’s retirement income – not to accumulate savings that can be passed on to future generations. Capital is supposed to be depleted over one’s retirement rather than being preserved as a bequest.”
Expect to hear much more of this to justify changes, encouraging retirees to spend their money rather than leave it in their will. Said Frydenberg:
“Being too conservative in how they draw on their super account balances can lead to retirees living frugally and settling for a lower living standard in retirement. It can also mean that for some, much of the money they worked hard to earn and save is left as a bequest, rather than supporting their retirement, as intended.”
A new Capital Depletion rule to address longevity
At the Forum, Frydenberg came close to announcing a new policy to encourage retirement products without immediate income but which might kick in at say the age of 80 to cover longevity risk. He said:
“For example, rather than complying with a minimum withdrawal rule, could products instead be allowed to comply with a capital depletion rule? … (to) better cater for longevity risk products that have more flexible payment structures, including deferral periods. We have also been consulting on ways to make it easier for people to purchase longevity insurance incrementally, which could be more attractive to some retirees compared to parting with a lump payment … But a rule that allowed for flexibility on drawdowns so long as there is a depletion of the capital over time would be able to cater for such products.” “While it would be premature of me to announce the outcome of this review today, I am hopeful that we will be able to deliver a package of changes that facilitates the emergence of new and innovative retirement income stream products.”
The basic intention is to give people more confidence to spend their superannuation in the earlier years of retirement, say from the ages of 65 to 80, knowing they have an income stream that then kicks in. Only time will tell if this product will be popular but clearly, annuity providers are excited by the possibility, including new entrants in the life insurance sector. Would retirees then enjoy a higher standard of living?
There’s no ‘never ever’ in politics
When the Government responds to the Tax White Paper and the Financial System Inquiry, some of these issues may be clearer. But we’ll see important changes to superannuation over the next couple of years which will be adverse for some people, especially those with large SMSFs.
Joe Hockey was right: never rule out anything in politics.
* Graham Hand is Editor of Cuffelinks and was a guest at the Committee for Sustainable Retirement Incomes Forum. This article is general information and does not provide specific advice to anyone. Cuffelinks is a free newsletter on investing, and a supporter of New Matilda , so we hope readers will reciprocate.