(03) 9020 2905PORTFOLIO POINT: The current rules are flawed. They’re in danger of breaking the system. It’s time for a rethink on super contributions, so here are some ideas, Minister Shorten.
True or false? In a year’s time, it will be harder to get money into super than it has ever been in the nation’s history.
True.
Sadly.
From July 1, 2012, the overwhelming majority of Australians will face their toughest ever restrictions on contributing tax effectively to super.
From that date, the standard concessional contribution limit will drop to $25,000 for everyone (there’s always an exception and I’ll come back to that).
You will be quite rare if you are allowed to put more than $25,000 a year into super via concessional contributions (CCs). (And even if you’re eligible, there’s a good chance you won’t be able to maximise your contributions anyway.)
The rules from mid next year mean that, if at age 30, you start putting the maximum into super every year until you retire at age 65, you will be able to get $875,000 into superannuation (in today’s dollars).
But that’s absolutely ludicrous. The proportion of 30-year-olds who could afford to put $25,000 a year into super would be less than 2% of that age group. And of that 2%, the number likely to do so would be lucky to be 0.1%, even given that the 9% compulsory employer contribution is made on their behalf.
If you’re 40, you will be limited to getting a further $625,000 into super, again at $25,000 a year. But there will be very few who choose considerable super contributions over reducing the monster mortgage or educating the rugrats.
At 50, with the hard lifting on the kids done, the mortgage paid down and two to three decades of super under your belt, you’re still going to find it tough. If you have more than $500,000 in super, you will also be restricted to getting in another $375,000 into super before retiring at 65.
(If you’re over 50 and have less than $500,000 in super, you’ll have different rules. Or so the government says … but I’ll come back to that.)
As a country, we punch above our weight in our national retirement savings. But we’re in danger of losing bragging rights as the restrictions become tighter and tighter. People will turn off super. They ARE turning off super (4/8/10 and 11/8/10).
The halving of contribution limits introduced during former Prime Minister Kevin Rudd’s term were short-sighted. The fact that two years down the track they have only been partially overturned is not just wrong, but stupid.
Those initial cuts went way too far. That’s universally accepted now, including by the government, who announced the 50-50-500 rule (click here, 19/5/2010) in response.
It needs to go further. Australians need to be encouraged to put more into super.
And, to that end, a little bit of light is shining. And not the train-coming-through-the-tunnel variety.
It appears Assistant Treasurer and Minister for Superannuation Bill Shorten agrees a mistake was made. If not publicly, he’s privately saying that the current settings on restricting concessional super contributions are ridiculous.
Only last week, in regards to the first tranche of the Future of Financial Advice reforms, Shorten proved that he was a good listener. That is, he made significant changes to his original tough positions.
So, here we go, Minister Shorten. If you truly have an open mind, here are a few suggestions.
Raise the limits back to where they were
No, this is not an ambit claim.
Even the “father” of compulsory superannuation in Australia, former PM Paul Keating, says Rudd got these cuts wrong.
The new rules placed on super contributions by former Treasurer Peter Costello when he introduced Simpler Super were not, by any means, more generous.
The fact that super pensions paid after age 60 would be tax-free was more generous, sure. But what Costello introduced was a serious curtailment on people’s ability to get money into super in the first place.
The rule used to be a little over $105,000 per job! Costello opened a five year window to put in $100,000 for the over 50s, but was then reducing it to $50,000 a year.
Bring the limit back up to $50,000 from next year for everyone, as was originally set out
$500,000 is not a “reasonable benefit”
In their 2010 partial backdown, the Rudd Government essentially admitted it had gone too far by halving concessional contributions limits for everyone.
The change of heart has become known as the 50-50-500 rule. By saying that you can contribute a total of $50,000 to super if you are over 50, but have less than $500,000 in super, the government is saying that $500,000 is a “reasonable” amount to have in super. It’s a back-door reintroduction of the much hated “reasonable benefits limit”.
This is one thing that Shorten has been somewhat public on. He believes that something closer to $1 million in super would be more likely to be “reasonable”. (Robert Gottliebsen argues $2 million for a couple.)
So, this is a pretty simple suggestion. Change the 50-50-500 rule to the 50-50-one-million rule
(It doesn’t have the same ring about it.)
Restrict the non-concessional contribution caps
There’s a side to the argument that says that the halving of the contribution caps was due to tax leakage. There’s another side that says it was political – that Labor didn’t like the wealthy using super to reduce their tax. I subscribe to the latter theory.
If it was political, then it’s possible they attacked the wrong limit.
Instead of halving the concessional contributions limit, perhaps they should have reduced the non-concessional contributions limit.
Super members are allowed to put in $150,000 a year into super non-concessionally, or $450,000 to cover three years’ contributions.
It’s far more likely to be the super wealthy who are able to make large, after-tax, contributions to super, such as NCCs. And those contributions will NEVER be taxed in super.
Reinstate the concessional contribution limits and make minor reductions to the non-concessional contribution limits
Lifetime limits and rolling five-year limits.
Two months ago (13/7/11) I raised two ideas on this topic. One was from SISFA (the Small Independent Superannuation Funds Association) and one was from … um, me, I think.
SISFA was arguing that there should be a rolling five-year limit. If you’re not able to contribute your $25,000 to super in one year, because of factors explainable to the economy or your household, that you should be able to make up for it sometime in the next five years.
And I’d argued on a lifetime limit. Whether you put your money in at the start, or the end of that lifetime limit was unimportant, but you would be able to put a certain amount in, even if you had to miss a few years because of economic factors.
Introduce rolling five-year limits, or lifetime limits
Allow higher contributions, but force higher drawdowns
Allow people to get more money into super by raising the limits back to $50,000, but increase the amount of money that needs to be drawn down.
At the moment, the minimum drawdown for people under the age of 65 is 4%. From 65 to 75, it’s 5%. If you lifted that by 1 per cent, you’d get the money back out of super faster.
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Most of the above are my thoughts that have hit me in recent times. I’m not going to claim they’re genius.
I know you, however, as Eureka Report readers can have greater ideas, possibly that you’ve been working on in the back of your head for some time.
If you’ve got any better ideas, send them to me at bruce@castellanfinancial.com.au and we’ll see if we can’t give this young fella Shorten a few things to consider.
Whether you’re a SMSF trustee, or working in the industry, if you’ve got some ideas on how some changes could be made to tweak the system, shoot them my way.
Shorten’s in the mood for listening. Let’s give him some food for thought.
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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 advised to consult your financial adviser.
Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking.