(03) 9020 2905SUMMARY: Thwack! A pointer to how the super taxes rate could be effectively raised, without resorting to taxing pensions.
There is more than one way to skin a cat. And it appears we’re going to see a few feline pelts when it comes to winding back the generosity of tax-free super pensions.
That is, you don’t have to actually reverse the rule and start taxing pensions, as the previous government announced it would do (with its plan to tax pension funds earning more than $100,000).
You could simply raise the effective marginal tax rate (EMTR) applicable upon receipt of a tax-free pension. You might not be taxed on the pension itself … but we’re going to withdraw some other government benefits.
The Abbott Government says Australians are going to have to get used to paying higher taxes and receiving fewer government benefits – “the end of the age of entitlement”. And higher EMTRs are writ large on the thumping National Commission of Audit (NCOA) document, delivered late last week.
The government hasn’t endorsed the 60-odd recommendations from the report. But there’s a strong chance many of them will get a run, and possibly even with bipartisan support in the coming years.
Commonwealth Seniors Health Card
The most obvious higher effective marginal tax rate is the recommendation that a “deemed” income from the tax free super pensions be used to add to the “adjusted taxable income” of retirees, to impact on their access to a favourite of pensioners, the Commonwealth Seniors Health Card.
Currently, if you earn under $80,000 as a couple ($50,000 for singles), you can access to the health card, which can deliver thousands of dollar in benefits each year. Tax-free super pensions do not count towards this income test.
The NCOA has recommended that it does deem income from pensions, which would instantly knock out tens of thousands of the more than 300,000 holders of the card. (There was no recommendation from NCOA for a phased introduction of this.)
The main issue raised by the NCOA is that different treatment of similar sums of money inside and outside of super.
If a couple had $2 million in term deposits earning 4% outside super, they would pay income tax on the $80,000 earnings, plus fail to gain the seniors health card.
However, if the money was sitting in a super pension, no income tax would be paid, plus the seniors card would be received.
The cost of providing incomes in retirement is one of the largest costs to the taxpayer. And the recommendations from the NCOA aim to reduce the cost over time by reducing the benefits paid.
Raising the preservation age
The preservation age is currently on its way from being moved from age 55 to age 60. The NCOA wants that to continue on the same trajectory that it’s currently on to age 62 instead.
That would mean the following changes to the preservation age table.
Table 1: New super preservation ages
Existing/New Born after … Born before … Preservation age
Existing 30/06/1960 55
Existing 1/07/1960 30/06/1961 56
Existing 1/07/1961 30/06/1962 57
Existing 1/07/1962 30/06/1963 58
Existing 1/07/1963 30/06/1964 59
Existing/new 1/07/1964 30/06/1965 60
New 1/07/1965 30/06/1966 61
New 1/07/1966 and after 62
Then, after that, and well flagged as a likely recommendation, the preservation age should then move in lock-step behind future rises in the age pension age, allowing access to your super five years behind access to the age pension.
Age pension age increase
The secret that wasn’t. It’s recommended that the age pension age be moved out to 70. It’s currently scheduled to rise to 67 in 2023.
But the surprise is the recommendation to turn increases in the future into a formula, based on increases to life expectancy. The NCOA wants the age pension qualifying age to be linked to 77% of the average life expectancy for someone at age 65, which is expected to rise from 86 in 2014 to 90.7 in 2053. This would create the age pension age of 70.
This would have been slower than some would have expected to come from the recommendations.
Lowering the age pension
The NCOA wants to lower the overall age pension, over time, by shifting the link to the male average weekly earnings to 28% of average weekly earnings of both sexes.
This would see a considerable reduction in the pension paid over time. By 2030, based on current projections, the age pension would be about $1500 a fortnight. Under the proposal, it would be approximately $1230 a fortnight.
Removing the principal residence exemption
The NCOA’s commentary suggested that more Australians who have worked to build up equity in their home, or had paid it off, could be expected to draw down on that equity as they age via reverse mortgages.
You can expect an explosion in that sector of the mortgage broking industry in about 13 years.
“Financial products exist which allow homeowners to draw down on the value of their home over a period of time … a high threshold will mean that there is significant equity that would not be assessed,” the NCOA said.
Increasing the tapering of the age pension
The NCOA said that Australians can currently earn up to about $47,000 in private income before they no longer get an age pension, because of the taper rate of 50% on the income test.
The NCOA would like the taper rate increased to 75%, which would knock you out of getting a pension at an income in today’s dollars of about $32,700.
Wrap-up
This is, in essence, what the National Commission of Audit has delivered in last week’s thumping document, which takes a very broad and long-term view on how to cut the cost to government of assisting with income streams for Australia’s oldies.
For the great unwashed, there have always been two irrational fears when it comes to retirement incomes.
The first is that government age pension won’t exist in the future. It always will. The more realistic concern has been on how generous it would be. And the answer to that is less so than it is now.
The second is that their superannuation won’t exist when they reach retirement. The NCOA’s recommendations, if followed, will mean that there will be a greater emphasis on private super pensions and being able to fund your own retirement, so any government plan will have to have superannuation security at the forefront.
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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