Raising the preservation bar

PORTFOLIO POINT: The pressure is on to lift superannuation’s “preservation age” closer to age pension eligibility.

We know superannuation is about investing for the long term.

There’s an accumulation phase of up to 45 years. That’s about getting enough money into it and then managing it as well as possible so that it’s enough to be able to provide a reasonable income stream in retirement.

And it could be up to another 40 years in pension phase, depending on your ability to keep a grip on your perch. That becomes about managing it well enough, and spending it slowly enough, so that it does last until round about the time you fall off. (And it’s not easy.)

The powers that be, understandably, want to make super last longer in retirement. That’s what much of government policy is about, particularly recent incentives of super tax benefits to the lower-paid, such as the low-income superannuation contribution (LISC).

But if governments were to get serious about making super last longer in retirement, what could they do?

Well, for one, they could stop you accessing it until later in your life. And the pressure is on to do just that.

The problem with our ageing population is that we’re going to get this big bubble of oldies who are all going to be doing something other than working in a few decades. Spending the Kids’ Inheritances predominantly.

This is for a number of reasons. The Baby Boomers will cause a problem, simply by weight of numbers. And science and medicine keep on finding new ways to keep our hearts pumping that little bit longer.

But the current rules state that those born before June 30, 1960, can access their super from age 55. Those born on or after July 1, 1964, have to wait until they’re 60.

Table 1: Preservation age

So, anyone born after mid-1964 (now turning 48) will not be able to access their super until they are 60.

John Brogden, head of the Financial Services Council – which acts as a representative and lobby group for retail investment and superannuation groups – said there is a strong need to lift that minimum age of 60.

“With life expectancy now 79 for men and 84 for women compared with 72 for men and 79 for women in 1992 when the Superannuation Guarantee was introduced, the time has come to consider whether the superannuation preservation age of 60 is appropriate,” Brogden said.

“The government deserves credit for increasing the age pension eligibility to 67 in 2009. It’s now time to close the seven-year gap between the preservation age for superannuation and the age pension. The gap will accelerate consumption of superannuation before retirees become eligible for the age pension,” Brogden said.

Brogden said that the an extra two years with 12 per cent Superannuation Guarantee payments would have an enormous impact on people’s retirement readiness and on the average super balance in retirement.

Underlying what Brogden is saying is that there will be more incentive for people to work longer and delay access to super until later, BECAUSE they won’t be able to get the government age pension until later in life.

Brogden would like to see the preservation age lifted from 60 to 62. He believes that would reduce their “personal savings gap” by 30%.

(For the record, Superannuation Minister Bill Shorten says there are no plans to increase the super preservation age. Take that as you will.)

The fact is that governments – most likely heavily pushed by Treasury who are looking into a crystal ball that runs a lot further than the next election – understand this demographic shift and know they need to do something.

It probably wouldn’t have mattered whether it was Labor or a Liberal/Coalition government of the day, the increase to the age pension age was virtually inevitable from a pension sustainability point of view.

Even the International Monetary Fund is pushing for nations to increase the age at which pension benefits (whether superannuation or government provided) is accessed. They’re no doubt basing that on the recent Greek tragedy.

But when it comes to access to the government age pension, a new line has already been drawn in the sand.

If you were born before mid 1952, you’ll be able to access the age pension from age 65. Later than that and you’ll be waiting up to age 67 to get the government age pension.

Table 2: Age pension age

An increase in the preservation age is somewhat inevitable. Governments need people to work longer, if they’re healthy enough, and to delay the time at which they become partly or wholly reliant on the government purse.

It will force people, on average, to hang around in the workforce for at least a little bit longer. It will also force people to hold more of their assets outside of super. If you can’t access your super until age 62 (did someone mention 65?), then those who want to retire early will have to have non-super assets on which to draw on.

More assets outside of super mean higher taxes, because super is more lightly taxed than non-super assets.

Like the age pension age increase, expect an increase in the super preservation age to just pop up, a little unexpectedly, in an upcoming budget.

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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are highly complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking.