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My 'purpose of super' is probably not yours

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.

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 Editor of Cuffelinks and has worked in the finance industry for almost 40 years.

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11 Comments

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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