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How safe is my super from rule changes?

"How safe is my super from changes to the regulations? What do you think the government has in store for us?" The person who asked me these questions is an executive in his early 50s who is busily trying to get his finances in shape to retire at age 65.

For a person of his age I am not overly concerned. There have been non-stop changes to the superannuation system since it became universal more than 25 years ago, but there has been no element of retrospectivity. Yes, there are many voices now saying the system is too generous, but they tend to be focusing on those few people who have more than $5 million in super, and who are certainly not representative of the majority.

So what can we expect? The government has promised no changes in their present term but this has only a year to run at most. Opposition Leader Shorten has already announced Labor’s intention to increase the contribution tax to 30% for people whose adjusted taxable incomes are in excess of $250,000 a year. This is not a huge leap from the present system where the 30% tax applies to people with incomes of over $300,000.

Under the present system, there is a 15% tax on earnings from superannuation funds in accumulation phase but this reduces to zero once the fund enters pension mode. Under the Gillard government there was a proposal to tax the income of a pension fund once fund income exceeded $100,000 a year per member. This was a fairly mild proposal because the 15% tax was only on the excess income over $100,000. But the predictable outcry ensued, and the proposal did not become law.

It is now Labor policy to reintroduce this tax but they have made it tougher – it will apply once income exceeds $75,000 a year. Given the failure of the last attempt, the chances of this getting through must be considered slim, but even if it did, it’s probable only a few would be affected.

Think about a couple with $4 million in super, with a portfolio that is spread in a conventional manner between cash 30%, local shares 35%, international shares 25%, and listed property 10%. The income including franking credits would be around $73,000 each, which would still keep it under the threshold for Labor’s new tax. I suspect when they start doing the numbers, they may come to the conclusion that the gain is not going to be worth the pain.

The Association of Superannuation Funds of Australia (ASFA) proposes that money in pension phase be capped at $2.5 million per member. It might be easy in theory but devilishly difficult in practice. Is the intention to take the balance at June 30 and simply switch the excess, if any, to accumulation mode? If the market has a sudden fall or rise, or if there is a big withdrawal, do you have to go through the whole process again? But once again we’re talking about balances of $5 million and over, which is hardly likely to worry mums and dads.

Emails arrive continually from people who are concerned that the government will change the rules to prevent withdrawal of lump sums. I do think at some stage in the future the government of the day might decide to compel retirees to take part of their superannuation as an income stream, but that may be a long way off. It would be a brave government who would compel retirees to lock up part of their retirement funds in an annuity when interest rates are at historic lows.

Yes, more change is inevitable. In my view, the biggest risk for most retirees is an overemphasis on cash in their portfolio because they are averse to risk. Many retirees can now expect to live 25 years or more after they retire. For them, holding money in cash may be one of the riskiest strategies of all.

 

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. See www.noelwhittaker.com.au.

4 Comments
geoff godden
September 09, 2016

are politicians exempt from these s/f changes and if not why not ????.

AJ
October 29, 2015

100% Warren. Many, many people out there have this interpretation that superannuation is a "product" as opposed to a tax environment (with accessibility restrictions). I am always telling my clients that they can invest in effectively the same assets inside super as they are able to outside and they look at me stunned.

It's much the same as them thinking it is the fund administrator that determines the returns they receive as they do not understand the difference between who administers the super fund and how their money is actually invested.

Also on Ken's point, I'm curious to know as well. I remember the Government at the time stating that the tax on pension earnings over $100,000 pa would only affect about 16,000 Australians with $2 million or more in their pension (Shorten loves to pander to the people doesn't he?).

This was all well and good if the fund only earned 5% per year, but in the particular year he said it many funds earned 20%, meaning anyone with only $500,000 in a pension, quite a lot more than the 16,000 "super rich" he was referring to, would be taxed.

Warren Bird
October 28, 2015

I agree with Noel's point about excessive cash holdings being the biggest risk for many superfund investors.

But, I've also met a lot of folk over the years who have put less into super than they could have - and possibly should have - because of fear that it will "just lose me money when the market crashes". When I've pointed out that you can invest all your super in cash if you want they have looked at me incredulously, because no adviser has ever told them that. Also, all the news reports on balanced super funds and their returns have created the impression with some people that it is super itself that is the volatile asset class.

I don't know that this misunderstanding is widespread, but it's happened enough in my conversations that I feel it's worth mentioning. Advisers need to accept that some people just want to know their money is "safe". Many think that means keeping it in a term deposit rather than putting it into that risky thing called super.

So you need to get them first of all in to a cash option in super, so they get all the after-tax benefits of doing that. Then when they understand super, you can start talking to them about the benefits of risk and diversification.

It would also help if the news reports of super fund returns would quote growth funds, balanced funds and cash fund returns to help people realise that there are choices with super.

Ken
October 23, 2015

I found Noel Whittaker’s article very encouraging. I have read other articles on the same subject which I found confusing especially in the use of words like taxing the “income” of the fund in pension mode.

Would you have Noel confirm that we are talking about “earnings” and provide his assumed earning rates for each of the asset classes he uses in the example so that I can make my own estimates for my fund.
Also would he comment on whether capital gains (realised or unrealised) are included or how they are treated.

 

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