(03) 9020 2905PORTFOLIO POINT: Leave minimum drawdowns and non-concessional limits alone! But if Super Minister Bill Shorten wants some suggestions to make super fairer, he need only have asked Eureka Report readers.
Well, I certainly asked the right people. And I knew Eureka Report readers were up to the task.
Thank you for your email responses to last week’s column (click here 7/9/11). There were some great suggestions to make super fairer. (And a few criticisms of some ideas I’d floated, which are also welcome.)
The premise of last week’s column was that in less than a year, on 1 July 2011, getting concessionally taxed money into super will be more restricted for Australians than it has ever been in the history of retirement savings in Australia.
The cutting of the concessional contributions (CCs) limit to $25,000 for everyone (with the still uncertain exception of the 50-50-500 rule, click here 19/5/10) from 1 July next year is going to have a disastrous impact on people’s ability to save via super.
The point? The super contribution rules are broken. The halving of the CC limits by the Rudd Government went too far.
The government has admitted as much. And the murmur is that Bill Shorten is prepared to fix things. So I made a few suggestions myself and then asked you for some.
As a general rule, my suggestions in regards to lifetime super contribution limits and contribution averaging provisions were well received, as was my suggestion on lifting the 50-50-500 rule to something like 50-50-$1 million.
But, with brutal honesty, you had next to no time for two ideas I floated, including my suggestion to lift the drawdown limits (reader DM: “Bruce, please desist from sending such ideas to Bill Shorten”) in return for higher contribution limits, or on a potential reduction to the non-concessional contribution limit.
Allow “family” concessional limits
This one is my favourite. It’s not just brilliant, but fair. And fair, to my mind, makes it even more brilliant.
Andrew suggested: “Allow contribution caps to be shared amongst family members. For example, allow a spouse to salary sacrifice into a non-working spouse’s super as well as their own super account. This would remove the impact on a non-working (spouse’s) super balance”.
That is, allow a couple to properly utilise their joint limit of $25,000 each, or $50,000 per couple.
The current rules do not allow for this – for most people.
If only one member of a couple is working as an employee, they can contribute up to $25,000 to super. Sure, they can “super split” that $25,000 with their partner. But if the other partner is not working, they are limited to that $25,000 between them. Effectively, the non-working spouse’s limit of $25,000 gets wasted every year.
(There are a few other ways to make contributions for the non-working spouse in the current rules: the $540 rebate for a contribution of up to $3000; and the $1000 to get the government co-contribution. Peanuts.)
This suggestion has the potential to redress an inequity that exists between employees and the self-employed. If introduced properly, it’s not just potentially brilliant, Andrew, but would add fairness to the system.
If you are self-employed (say through a company and trust structure), again with a non-working spouse, you can potentially make super contributions for your spouse through the company/trust. That would mean $50,000 of deductible super contributions – $25,000 for each “worker” each year, even if one of the “workers” ain’t workin’.
“Do as we say, not as we do”
As pointed out by several readers, Jeremy Cooper’s Super System Review specifically excluded government employee schemes.
The rules surrounding some defined benefit (DB) funds mean that many are effectively getting contributions well in excess of the $25,000 limits.
As a result, some DB fund members are getting effective contributions well in excess of the $25,000 limit. Sure, those DB rules can’t be rewritten, as that would be unfair to those who took the “risk” to sign up for them, but the $25,000 CC limit now in existence creates a worse case of the “haves” and “have nots”.
Just another reason to raise the $25,000 limit on an issue of fairness.
Global limits on contributions
There were several suggestions from readers on having some sort of high global, or lifetime, limit on contributions or caps on super fund amounts.
However, some of those were, in effect, recommending a reintroduction of a reasonable benefits limit (RBLs). The dastardly RBLs were abolished by former Treasurer Peter Costello. And, in my opinion, there has never been a greater pen stroke cast. RBLs were evil. The concept of them is evil. And they are a stupidly complex thing to manage and plan for.
The last thing anyone planning their superannuation future should want is to deal with a new RBL limit.
Cuts to non-concessional contributions
Unanimous (by those who passed comment) was the opposition to my suggestion of a potential reduction in the non-concessional contribution limits.
However, I think some of you might have misunderstood me. I was not suggesting this would be a good idea, or that NCCs be axed. But if former PM Kevin Rudd’s premise was to stop the wealthy getting too much into super where they paid little to no tax, then perhaps they slashed the wrong limit.
It was more in the spirit of negotiation. That is, if Mr Shorten would consider a small cut to the NCC limits in return for an increase in the CC caps, then that might be worth considering.
Non-concessional contributions and youth
There was a lot of feedback on the cutting of NCCs. Much of it claimed that this is the way to get extra into super in a world of lower CC limits.
However, it is really only a way for older Australians to get money into super. Large NCCs are not something done by younger Australians, particularly those who have a mortgage.
If a 45-year-old with a $500,000 mortgage had a spare $150,000 lying around, they would usually be far better NOT putting that money into super. The $150,000 placed against the mortgage, in either an offset or a redraw account, would provide a tax-free return at the prevailing interest rate. If interest rates are 7%, then the real return is around 11.38%, if they earn more than $100,000 a year.
Non-concessional contributions are a good way of getting money into super. But they are not an efficient way of getting money into super, unless your mortgage is paid off, or within sight of being paid off. In general, NCCs are for the over 50s (if we’re generous), but particularly the over 55s or 60s.
Raising the drawdown
But you wanted me sent to the “sin bin” for floating the idea of raising the drawdown minimums within super. Again, in my defence, it was a bargaining tool. I was only suggesting it as an option to potentially have contributions limits lifted.
However, there was a misconception among some readers. A bigger drawdown from your super fund won’t necessarily make you run out of money much faster.
You don’t have to spend it! But as the money is now sitting outside super, the earnings on that money would become taxable. I was suggesting an extra 1%. Of a $2 million super fund, that would be an extra $20,000 sitting outside super, the earnings on which would be taxable income.
But most importantly …
The $25,000 limit just isn’t fair. It is a tiny fraction of what previous generations could, and current generations were previously allowed to, get into super.
It has to be lifted. And it should go back to $50,000. And it should be indexed.
If not back to $50,000, then how about $35,000 or $40,000 (indexed)? The change needs to happen sooner rather than later.
Time’s ticking, Bill …
*****
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.