(03) 9020 2905SUMMARY: Big-picture changes are coming to superannuation. It’s never too early to plan to beat them.
It’s time to declare at least one superannuation dream dead. It’s been in a coma for a while. But Treasurer Joe Hockey put a pillow over its face last week and held it down tight.
It didn’t fight back. Its very weak pulse was snuffed out. Gone. Plan the funeral.
If any of you were holding on to even a glimmer of hope that we will see a return to structurally larger super concessional contributions limits … you can take your little dream out into your back yard and dig a six-foot hole.
Outside of inflation-linked increases to concessional contribution limits, there will be no return to concessional contribution limits of $50,000 or $100,000. Never. Ever. (And “never ever” in politics, of course, means the current term, not literally never ever. Politicians don’t do that.)
Mr Hockey, in a speech last Wednesday, backed up by radio interviews with the talkback heavyweights on Thursday, made it crystal clear that the Coalition government is of the opinion that superannuation tax breaks cannot be made more generous than they currently are.
While he didn’t state it, it seemed pretty clear that he had formed the opinion that super concessions might have to be wound back at some stage. Though not in a first term of government, as that would break an election promise.
The upcoming Budget – now two weeks away – is going to launch a conversation about the affordability of retirement income streams, predominantly superannuation and the government age pension.
“We said we’re not going to have any adverse decisions in relation to superannuation in our first term. But clearly, as we have the proper debate about the ageing of the population, we need to look at the role of superannuation and the preservation age and that’s something that the … Financial System Inquiry is looking at, and will look at in the context of the decisions we make in the Budget but also the Intergenerational Report that comes out,” Hockey said.
Hockey quoted a number of statistics in his speech and the subsequent interviews.
The one that sticks out to me is this: the number of retirees who currently receive the government age pension (at least a part pension) is 80%. In 2050 (when the compulsory superannuation system started in 1992 will be mature), the number of people expected to receive at least a part pension is still expected to be 80%.
Hockey is pointing out two things here. First, he believes too high a percentage of older Australians are getting the age pension. Perhaps h believes only 50-60% should get it at all. Second, he also thinks superannuation concessions aren’t working properly, or are too generous to be sustainable.
So, in the long term, fewer people will receive the age pension and tax concessions for super are going to be fundamentally restructured.
Specifically, what’s likely to happen.
• The age pension will rise from the current 65, to the already scheduled 67 (in 2023), and onwards to 70.
• Access to the government age pension will be tougher. The government believes that too many people with $1 million in net assets receive a part pension.
• Super concessions will become more generous for lower income earners to encourage them to save through super.
• Higher income earners will get nothing. Or worse – the benefits they get from super might go backwards.
• The preservation age for super will also increase, probably to 65, from the current 55-60 (see below).
• Annuities could become compulsory to stop the big spend (see my column of 10/10/2012)
Preservation age increase
Those born before 30 June 1960 have a preservation age of 55 – that is, the age at which they can begin to access their super.
Those born between 1 July 1960 and 30 June 1961 have a preservation age of 56. It increases one year for each year from there. Anyone born on or after 1 July 1964 has a preservation age of 60.
However, this is likely to increase. Some have suggested that the preservation age be tied to the age pension age. For example, as the age pension age increases, the preservation age is in lock-step, five years behind.
This would mean that when the age pension qualification increases to 67 in 2023, the preservation age would automatically increase to 62 (if five years was chosen as the automatic gap). An increase to 70 for the age pension could see the preservation age increase to 65.
Those who are currently 55 can access their super now (either as a full pension or a transition-to-retirement pension). However, they have to wait another 10 years before they can access a government age pension.
The lift in the preservation age to 60 will mean the “wait” from accessing super to accessing a pension will decrease from 10 years to five years. However, the lift in pension age from 65 to 67 will then increase the wait back up from five years to seven years.
So, over the next decade, the gap between preservation age and pension age will go from 10 to five to seven years. This is likely to be pegged, possibly at five years, which will mean an increase to the preservation age.
So, what do you do?
Every time a major threat to super emerges, the panic sets in. “Will it still be worthwhile putting money into super?” is the inevitable concern.
The answer will be a resounding “yes”. Super will always be a more tax-effective solution for retirement savings than any other investment vehicle. It needs to be more attractive, or why would people use it?
It’s just a matter of how much more generous it is. If it’s too generous, governments will reduce the benefits.
So, what do you do now?
Firstly, nothing major is likely to come out of the upcoming budget in regards to super. The Abbott Government made promises about superannuation and Joe Hockey has been at pains to reiterate that those promises will be kept. The major changes they have made I went through in this column (11/11/13). But they all relate to the first term of government.
There are no promises for the second term of government. Said Hockey: “In relation to many of the structural changes that we have to make, the Australian people (will) have the opportunity to make decisions at the next election.”
Make the most of the current contribution rules. Get in up to your concessional contribution limit whenever you can. That’s $35,000 for the over-60s for FY14 and $25,000 for everyone else. Next year, the $35,000 limit applies to anyone over 50, while the rest will have a limit of $30,000.
Consider getting more non-concessional contributions into super. These limits are rising to $180,000 from 1 July, 2014.
The most important part of the game is still to get your investment strategies right. You need to be taking appropriate risks in your superannuation.
Never lose sight of two things: the length of time that you are investing your super for; and that super will always lead to a better tax outcome than non-super monies.
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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 extremely complex and require high-level technical compliance.
Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au