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My 'purpose of super' is probably not yours

Note: This article was originally published on 18 December 2015. With both the Government and the Retirement Income Review arguing superannuation should be used to fund retirement, even if it means running down capital, rather than leaving a bequest, a rerun is timely. In addition, Paul Keating said last week: 

"I designed the system. I used to say to the caucus of the Labor Party, what superannuation is about is personal empowerment. That is you can cut the shape of your life, particularly at the end of your life, without reference to a government agency ... I think people in retirement think in family terms." 

In October 2015, the Government announced that it would enshrine the objective of superannuation in legislation, as recommended by the Financial System Inquiry (FSI). This has never happened.

***

Have you ever been in a meeting where everyone in the room, except you, seems to agree on something? You wonder whether you should keep quiet or start asking a few probing questions. I sat through half a day of speeches before launching into my own special version of the truth, much to the dismay of other delegates.

It was in June 2015 at the inaugural conference of the newly-formed Committee for Sustainable Retirement Incomes (CSRI) where everyone else seemed in furious agreement that we not only need to define a ‘purpose’ or ‘objective’ for superannuation, but it was obvious what it was. As the Committee’s Chairman, Michael Keating, wrote later:

“The FSI [Financial System Inquiry] recommended that the objective of superannuation should be to provide ‘income in retirement to supplement or substitute the age pension’, and there is an emerging consensus that superannuation should be directed to providing a retirement income and not other benefits, including bequests.” (my emphasis).

Whatever the future, that was not the past

Is that right? It that the consensus? Not for me. I have been putting money into superannuation for 20 years without an expectation that I will need the majority of it ‘to provide a retirement income’. It’s a tax-effective place to save, entirely within the rules, and I have foregone current consumption to secure my future and avoid any likelihood of being a drag on the public purse.

For many people, superannuation is both funding a retirement and leaving a bequest. It’s a piggy bank, a store of wealth, with a strong expectation there will be plenty left over beyond retirement income to give to their children or heirs. Why is it different to the favourable taxation rules around owner-occupied housing, or to a lesser extent, negative gearing, or family trusts? I could have bought a harbourside home and enjoyed tax-free capital gains, but instead I chose superannuation. If we are defining ‘purposes’, we should look at the entire package of different taxes and benefits, not only superannuation.

My view may even be part of the majority in the real world. At the recent 2015 CSIRO and Monash University Superannuation Research Cluster, a study reported that 90% of the amount an average retiree enters retirement with (including family home and non-super) remains unspent upon their death. On 23 May 2015, The Australian Financial Review quoted Treasury work which found that most people still have around half of their superannuation balances at the time of average life expectancy.

So the ‘purpose of superannuation’ is far from settled based on actual experience, and while it may fund part of a retirement, it is at least as likely to become a bequest.

What did David Murray say?

David Murray and the FSI identified a major deficiency of superannuation being the lack of a clearly articulated objective to guide policy. Recommendation 9 states:

“Seek broad political agreement for, and enshrine in legislation, the objectives of the superannuation system and report publicly on how policy proposals are consistent with achieving these objective over the long term.”

That’s a high bar for the ‘objective’ to jump over, and a major challenge for the government. It goes on to say, “Superannuation is a vehicle for individuals to fund consumption in retirement largely from working life income.” Not much sympathy for bequesting there.

What does the Superannuation Complaints Tribunal say?

The government agency charged with adjudicating on superannuation disputes is the Superannuation Complaints Tribunal (SCT). In its Annual Report 2014-2015, it writes:

“There are some common misconceptions about superannuation death benefits that can result in unexpected outcomes for the beneficiaries of a death benefit, and may result in a complaint being made to the Tribunal. The most common misconception, arguably, relates to the purpose of superannuation. Broadly speaking, the purpose of superannuation is to provide income in retirement to members and their dependants; it does not form part of a person’s estate. Accordingly, a superannuation death benefit should be paid to dependants and those who had a legal or moral right to look to the deceased member for financial support had they not died.” (My emphasis. Thanks to Robin Bowerman of Vanguard for this point).

There it is … “and their dependants”. Sounds like a bequest to me. The SCT is an independent government body that deals with complaints relating to the decisions trustees make in relation to superannuation, and of the 2,700 complaints processed in 2014/2015, 29% were about death payments. A large amount of its work, therefore, is sorting out who should benefit from a bequest.


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Superannuation specifically acknowledges bequests

Superannuation legislation has specific features designed for appropriate bequeathing. For example, Binding Death Nominations (BDNs) ensure superannuation is distributed according to the wishes of the deceased member, not at the whim of a new trustee of the fund or executor of the estate. Superannuation is not an asset of the estate and a trustee is not obliged to follow directions in a will, even if super is specifically mentioned in the will. The instructions in the BDN define the money flow.

The main reason a superannuation death benefit is paid directly to a dependant rather than the estate is to ensure other people (creditors, claimants for bankruptcy, etc) cannot access the payment benefits provided to a dependant.

In fact, the superannuation rules themselves facilitate bequests to non-dependants. There is no restriction on withdrawing money from superannuation for anyone who has reached preservation age and satisfied a condition of release (including retiring). However, on death, if it is given to anyone other than a spouse or a dependent child, there is a tax (on the taxable component) of 15% plus the Medicare levy (currently 2% for most people). The obvious approach is to gift it before death, if possible. Continuing from the Treasury work quoted in the AFR as above:

“People typically don't die all of a sudden. They might know it is coming so they draw down at least some of their super in advance and gift it to others to avoid the 16% tax that is payable if you leave your super to independent children or people other than your wife or dependent children," one source said.”

Conclusion

A potential benefit of this debate about the ‘purpose of super’ is to force each person to consider their own objectives, but we will be sorely disappointed if we think this will create consensus. I know what my purpose is, I know what David Murray’s purpose is, and I know what Michael Keating’s purpose is. But most importantly … what’s yours?

 

Graham Hand is the Managing Editor of Firstlinks. This article is general information and does not consider the circumstances of any investor, and has not been edited since its first publication in 2015.

The Superannuation Complaints Tribunal mentioned in this article has ceased operations. New complaints should go to the Australian Financial Complaints Authority.

 

20 Comments
Trevor
April 20, 2021

I totally AGREE with you John Bowen !
December 21, 2015
"And death duties and capital gains on the family home. Don't give the non dependent kids anything. Why should they get it, put it back in the public coffers so the government can spend it on wasteful projects."
[ Such a PITY that sarcasm is so often WASTED on the ideologically possessed !!! ]
"I put super into the system under the existing rules, nothing about just providing an income in retirement until death do I and the government part. I'm costing the government nothing in retirement because of my super, except a visit to the doctor once a year.
And how much super is too much, can anyone tell me how much it is going to cost me to live until I die. Even the best statisticians would be making a wild guess.
Leave the superannuation system alone, stop changing the rules every 5 minutes and give people some certainty."
Yep ! Stay out of my hip-pocket too ! What is in there I earned honestly with hard work and it's mine !

Ruth
April 20, 2021

'The main reason a superannuation death benefit is paid directly to a dependant rather than the estate is to ensure other people (creditors, claimants for bankruptcy, etc) cannot access the payment benefits provided to a dependant.' As I recall, it was to be paid to dependents if any because upon a second marriage there were situations where a husband had remarried leaving dependents behind to be paid for by the taxpayer as they were no longer covered under the deceased's estate. Don't worry about it. Young people today are waking up that contributing to super is too large a gamble. They prefer their own home. Who would voluntarily lock up >10% of their income for >30 years today? The system has changed so much in the last 30 years its original purpose has been destroyed. It's no longer seen as the contributor's money (favourable tax treatment was the reward for locking it up), but a tax source. Contributors today have no idea when or whether they will be able to access it and what tax changes will be imposed. That's what it will become. A source of tax revenue, and you will be unable to withdraw it. We have come a long way from the days when everyone was entitled to an age pension.

Paul Wales
April 09, 2021

The Superannuation Guarantee system was designed primarily to provide a retirement income for the majority of working Australians. In a speech titled “A Retirement Incomes Policy” delivered at the Australian Graduate School of Management on 25 July 1991, Paul Keating proposed “the creation of a comprehensive National Retirement Income Scheme. https://parlinfo.aph.gov.au/parlInfo/download/media/pressrel/U69F6/upload_binary/U69F6.pdf;fileType=application/pdf. This speech includes 18 references to retirement income/s.

For example:

“A system of more adequate private provision of retirement income sympathetically interfaced with the public pensions system will not only better provide for the aged, but is more likely to preserve the dignity and independence each have enjoyed in their pre-retirement years.” (pg 7)

“Such a scheme would maintain the Age and Service Pensions as the foundation of equity and adequacy in retirement income arrangements, but be complemented by the income of private superannuation with the dual systems integrated through to tax and social security systems.” (pg 8)

“A sympathetic interface constructed around the social security (and veterans) income test and the tax system can provide a real incentive to save and generate private income additional to pension, or for somebody with private income beyond the income test, to save in the context of an effective marginal
tax rate which encourages that private provision.” (pg 8)

“But a comprehensive income scheme incorporating privately funded superannuation benefits cannot be provided with 3 per cent of Award contributions or indeed even 6 per cent.” (pg 8)

“This will provide a level of benefit exceeding even the most optimistic expectation of the future level of the age pension. For those workers who stay on to age 65 the level of benefit will reach towards 50 per cent of pre-retirement income on an annuity basis, with full indexation to inflation, and 70 per cent reversion to the surviving spouse.” (pg 9)

“There are two great advantages in this scheme.
The first is that over time it will replace more of the increasingly onerous tax burden of age pensions with privately funded annuity incomes. It will do so with a retirement income much higher than that today provided by the pension.” (pg 12)

In June 1992, then Treasurer John Dawkins released a detailed 'security in retirement' policy, including the following statement:
"The Government sees the age pension not just as a security net for future retirees but as the keystone of its superannuation policies. It expects that most future retirees will continue to be eligible for the age pension (for example through a part pension) which, with self-provided and tax assisted superannuation, will allow a higher retirement income than is now generally available."

So yes, the introduction of compulsory national superannuation in 1993 was intended primarily to translate to retirement incomes to enable the majority of Australians to enjoy a higher standard of living than could be obtained just from the Age Pension. Despite this, neither the Keating government, nor any subsequent government, has mandated that superannuation must be taken in whole or part as an income stream nor developed innovative or attractive government/commercial lifetime income stream options (whatever happened to CIPR’s?) that would appeal to people concerned about investment and longevity risk.

If, almost 30 years later, retirees are fortunate to have accumulated sufficient superannuation capital (albeit with the assistance of generous tax concessions and earnings on those concessions) and/or choose to maintain a lifestyle in retirement that allows them to leave a substantial proportion of unused superannuation as an inheritance, that is their legal right. To paraphrase Bill Gates when questioned by a Sydney high school student on Q + A in 2015 in relation to companies engaging in tax minimisation to not pay more taxes than the law required, if governments are not happy with current arrangements, it is up to them to change the tax laws.

Jeff Oughton
April 08, 2021

This partial analysis of the purpose of super for the individual has a vital caveat - private super and its individual/beneficiary purpose(s) also needs to be put into the broader context of the nation's objectives & purpose - including future generations.

Private super is also not the only store of wealth and source of "retirement" income too; again, there are family/trusts, direct assets (notably the 'family" home) and financial savings/assets....as well as the govt funded aged pensions and other income support and aged care support. As the RIR has shown, elderly Australians on average over save and underspent, and give with a cold hand on death rather than a warm hand while alive!

Currently, about 80% of Australians are are private millionaires at retirement with plenty of private savings and a promise from the govt to provide a safety net if income/assets fall short of their needs in retirement. These elderly Australians have the financial freedom to choose the purpose of their excess private super savings. If there is a lack of disinterested advice or human biases, retirees may behave cautiously and wait to give with a cold hand, rather than warm via a bequest on passing their private estate to beneficiaries on death. Longevity risk is best managed by simply reviewing your position as the knighting uncertainty unfolds as we simply wear out and die; and so bequests will always be the residual option.

The other 20% of elderly Australians - exhaust their private super, continue to rent and will need the support from the government and tax paying Australians and/or future generations (may be even their own younger family members). The net effect, the government is dissaving to support spending by relatively poor Australians, by the vast majority of other Australians

In these broad terms, my answer is simple; 80% of Australians are very much free to choose their purpose of private super - within the policy constraint of national savings being in surplus over the very long run and so, for example, the Government has recognised belatedly the too generous concessions and introduced caps on private super.

There is always the "family" trust for wealthy Australians and at least, this is subject to income tax.

Kym Bailey
April 08, 2021

Of cause individual "purpose" of super will vary but in context, it is never about those that can, it is always about those that can't.
Origins of SG was a wage trade-off, a clever slight of hand by the Hawke Keating government to stare down the unions. Then the realisation of the benefits of compounding started to be understood and all of a sudden, super is the bees knees.
On the other end of town, it is simply a tax planning vehicle and used to overall manage high levels of personal tax. So it is a one size fits all savings pot.
No-one should disagree that being afforded generous tax concessions should be without a trade-off. In the case of super, it is access restrictions and rigid legislation in return for, the best tax deal in town.
In my view, the home and super should be a part of the retirement funding plan. I for one pay enough tax and I personally don't want the burden of the baby boomers in order for them to afford their desired retirement and then see them leave capital to the next gen. Only those that purely self-fund have that right.

Chris
April 08, 2021

One thing I did not know.....But to summarise, (in taxed schemes) the tax-free component will remain tax-free for the non-dependant, but the taxable component will be subject to 15% tax plus Medicare Levy

Can I just replay this.....

Does this mean when I die, regardless of my age at death, the taxable component of my super balance will cop 15% tax (plus medicare) when it is wound up and distributed.

Graham Hand
April 08, 2021

Hi Chris, we're not authorised to give personal advice, but let's talk generally.

You are correct about the tax if super is paid to a non-dependant (such as an adult child), but it would not apply to dependant (such as a young child). So to avoid the tax, a member could take money out of super the day before they die.

One way to improve the chances of doing this is to prepare all the paperwork for closing the SMSF in advance so all you have to do if you have a terminal illness is sign a document - or give prior instructions to your lawyer. This might not help if you're hit by a bus and die instantly. Cheery subject. Of course, seek your own advice on all this.

Roger Vaughan
April 08, 2021

Yep - it's a defacto Retiree Death Tax. Every political candidate should be asked if their party is prepared to abolish the Retiree Death Tax, during the next federal election campaign.

Dauf
April 08, 2021

Yep, really good article that sums up the government balancing its money grab (tax in super) and politics (omitting the obvious asset in homes...eg in the extreme are harbour mansions).

It will only get worse as Super is still the big bucket of money and the government will not be able to help itself and try and grab more. Before the last election we saw the argument for franking etc; it was not about what was fair, it was about only x% of people will be effected adversely, therefore too bad for them, we will win more votes from the envious who failed to plan. Both main parties are increasing becoming 'socialist' although they are not in any danger personally

Even on modest incomes, most (obviously not all) people who sacrifice a bit early on (no big TVs, Holidays, continual Uber eats etc) can be quite comfortable...just keep putting 10% aside, live within your means and investing. But government always rewards those who don't do the right thing

Sadly, it will only get worse for those who plan ahead

steve nagle
January 04, 2016

Great article Graham. I like the comparison you draw between saving in super / own home. The idea that each store of wealth attaches to a unique purpose does seem overly simplistic and irrelevant (rather like naming the 2% extra tax a medicare levy).

Robert
December 22, 2015

Great article Graham

It is not prudent at all to expect your super balance to last your entire lifetime given increased life expectancies. We should be conservative and accumulate MORE than we need just to be on the safe side. If the kids get it so what?

Graham Hand
December 20, 2015

Hi Ken, you are correct and I have amended the article. For most people, the Medicare Levy is 2% but there are different thresholds and rates. The actual rules for super payments to non-dependants are longer than I wanted to include in the article and can be found here: https://www.ato.gov.au/Individuals/Deceased-estates/Superannuation-implications/

But to summarise, (in taxed schemes) the tax-free component will remain tax-free for the non-dependant, but the taxable component will be subject to 15% tax plus Medicare levy.

Thanks, Graham

Ken Marquis
December 20, 2015

I very much appreciated Graham’s article in the latest Cuffelinks newsletter. It raises many valid points but how do we persuade Government to agree?
I have one query however. It mentions that the tax on superannuation benefits paid to non-dependents is 16%. My understanding is that the tax is 15% plus Medicare Levy which is currently 2% bringing the total to 17%. Have I got it wrong?
Regards,
Ken Marquis

Duncan Fairweather
December 18, 2015

People have different ideas about what is a sufficient retirement income. Some think it should be just a notch or two above the age pension. The accepted standard around the world is the 'reasonable replacement rate' which is about two thirds of pre-retirement income, If you are successful and earn more in your working life, you can expect more in your retirement. People on higher incomes pay the bulk of income tax and consequently get a larger share of any tax concession. As Ken Henry noted, tax concessions are justified because super savings must be locked away for a lifetime. Superannuation is compulsory saving but exposed to market risk and high management fees. The scale of tax concessions needs to be kept in perspective - they amount to less than $1 of every $10 of retirement savings. Contributions and accumulated earnings are much more significant. So most of the money in your superannuation account belongs to you.
People don't keep their super savings under the bed - it's out there in the economy supporting business and jobs. In trying to come up with a definition of what superannuation is for - something we've all understood for decades - let's take into account the wider economic and social benefits of a system that enables people to achieve financial independence in retirement for themselves and their families.

Duncan Fairweather
SMSF Owners' Alliance

Randall Kingsley
December 18, 2015

For me a superb position summary Graham. I totally agree with what you are saying. At a public policy level there seems to be no understanding or acceptance that superannuation will lead to unequal outcomes a result of savings choices made by individuals, some of it forced by Government. People seem to want to equate the Govt pension outcome with a superannuation outcome which to me is total bollocks. And yes we seems to readily accept investing in housing with its uneven outcomes and Govt support whilst at the same time decrying attempts to save for retirement and beyond. Super is clearly a savings vehicle that extends well beyond death.

And the Government has its hand in the till along the way taking 15% before you start each new accumulation investment leaving you with a 30% to be gained before getting back to square. The tax breaks are reasonable given the risks being taken accepting that there should be limits to that based on salary, age etc.

Hugh Fenton
December 18, 2015

Absolutely fine with your bequest view, except that it is clear that the tax-benefit of investing inside super would need to be balanced by the reinstatement of death duties on the residual super balance.

Not many people have dependent children on the date of death!

John Bowen
December 21, 2015

And death duties and capital gains on the family home. Don't give the non dependent kids anything. Why should they get it, put it back in the public coffers so the government can spend it on wasteful projects. I put super into the system under the existing rules, nothing about just providing an income in retirement until death do I and the government part. I'm costing the government nothing in retirement because of my super, except a visit to the doctor once a year.
And how much super is too much, can anyone tell me how much it is going to cost me to live until I die. Even the best statisticians would be making a wild guess.
Leave the superannuation system alone, stop changing the rules every 5 minutes and give people some certainty.

Pat Connelan
December 18, 2015

My understanding of the need for a single goal for super as achieving adequate retirement income is that this is the purpose at a PUBLIC POLICY level. If an individual wants to incorporate bequests into their retirement plan, that is fine. The question is at what point does the taxpayer continue to subsidise this?

In terms of equity, I see no reason why the taxpayer should underwrite the post-retirement living standards of people who would never need to call on the age pension anyway. But it seems many people in Australia still think of their taxation contribution as a sort of bank account for themselves.

Phil Brady
December 18, 2015

I'm with you Graham. But being a cynic I always look at the players like the FSC pushing for these types of things - they need a way to get the super trillions into retirement income products like annuities etc, that have not been meaningfully taken up as yet, for good reason. I'm also disagree with their push for specific retirement income products as an absolute solution for retirees, when I think old fashioned fundamental investment strategies will largely do the job for most over time. Its a bit of a nanny state approach to try and 'protect' everyone.

Gary M
December 18, 2015

Clearly the purpose of Superannuation is to destroy the world’s forests with all of the paper that it is generating – with all the mountains of legislation, regulations, compliance, administration, audits, minutes of imaginary meetings that were never actually held, policy think tank papers, technical guidelines, adviser training courses, ever more complex tax-minimising paper-shuffling strategies, research papers on inane details that nobody cares about, countless meaningless buzzwords and acronyms invented by people on the Super gravy train to confuse the actual owners of the Super money while their wealth is being siphoned off by the industry, endless debates over the actual purpose of super and why it exists in the first place….

 

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