Superannuation, the ultimate government cash cow?

[Julia]

Why is it that people who become quite wealthy and keep it in the super system receive more tax concessions than someone who is doing the same thing outside of it? They both have the same goal, but are taxed differently.

You know the answer to this already. Obviously, because there has to be some incentive to the individual to lock away their savings in an environment which - to offset its tax advantage - is vulnerable to the sticky fingers of governments. No one would do it if there were not the tax advantage.

20 years ago I was a bit like you. I worked hard, saved hard and invested hard outside of super. I put nothing at all extra into it. I had the same ambition of being self funded well before collection age. I achieved this goal and accepted the tax liabilities that I had to pay. It worked for me and it can work for anyone, nothing wrong with investing outside of super under those circumstances.

Fast forward 20 years and now it's collection age for my wife and I. We think differently now, we are moving our assets aggressively into super (I mean I'd rather pay 15% tax than 30%). If you were my age I'm sure you would rather pay less tax than the marginal rates.

People who can be self funded before preservation age are few and far between. The Government doesn't really worry about us, we are doing ok, we are not a burden on society. On the other hand the tax incentives are there for those that can't save. You have lower taxes, government co-contributions and that new low income payment going in boosting your balance. Without any of those incentives people just wouldn't save with super and we would end up where we were 25 years ago with very little money going into super.

Exactly. Your account above, Bill, pretty much mirrors my own.

Before compulsory super nearly everybody on the factory floor relied on the Government pension at retirement. It is better now, I support super as it is, anything less and it just wouldn't be worthwhile putting in and a lot of people will end up on the miserable government pension.

+1/

Just a note, even now only a few Months out we are reluctant to put a lump sum into our super "just in case they change the rules". We will wait until the last few weeks before we know for sure we will be able to access our money. Make no mistake, wind back super or tax it heavily and people won't put in, me included.

Bill, once you move into pension phase, I doubt there's too much likelihood of the government risking the political repercussions of altering the existing tax free conditions.

It is probably that I hate being told what to do.... if only you didn't have to work until you were 60, or probably 65, by the time I get there.

You don't. You can save whatever you like. No one is stopping you retiring as soon as you can afford it.
The rules have to accommodate a population of very different people and imo strike a pretty fair balance at present.
Get on with saving and retire at 45 like some of us have.

 

[Ves]

I meant within super. I can and do save outside of super.

Can't you access it in the US if you retire early? Singapore too perhaps?

 

[sptrawler]

It is probably that I hate being told what to do.... if only you didn't have to work until you were 60, or probably 65, by the time I get there.

That's true, I hated conforming, however as Bill says a point is reached where you have to make a decission.

Due to age, ill health, redundancy or disillusionment, you eventually have to give up work. Then you have to decide what to do with the assetts you've built up.
You can leave them outside super or sell them and put the proceeds in super.
As Julia and Bill have said, if you put it in super, it gives the government a lot of security over your assett base.
The upside is they cut you some slack on tax, but the pay off for them is a reduced welfare budget.

 

[Ves]

I think as craft says, there is an inflexion point where keeping any more assets outside super isn't as necessary (ie. you already have built an asset base that allows you to live with the freedom that you desire). Then you can start building the super up.

It's a good point - and food for thought. Thank you all. You all seem to be coming to that conclusion in your own ways.

 

[sptrawler]

I meant within super. I can and do save outside of super.

Can't you access it in the US if you retire early? Singapore too perhaps?

There used to be a loop hole where you could leave Australia, sign a stat dec and get your super, then come back.
I think they closed that up about 10years ago.

 

[craft]

A person currently earning 100K pa will receive 9K per year in compulsory super leaving 16K [21% of ordinary wages] of concessional cap to utilise through salary sacrifice if they wish.

Back of the envelope and using the following assumptions:
40 Years of contributions; 3% Inflation; 6%pa Gross dividend; 6%pa Capital Gain.

Directing that 21% of an ordinary wage to super would accumulate 35 times ordinary wages in today’s dollars after 40 years. By changing nothing other than the taxation to marginal PAYE rates the figure drops to 16 times for outside super.

The magnitude of the tax concessions means government tinkering is a risk but the rewards are pretty substantial also. Don’t just look at the risks. The earlier you contribute the less in total you need to contribute to achieve a given outcome. Missing the early generous incentives and the grandfathering arrangements to protect them has been a risk to late accumulators.

My for the case in favour of utilising super structure early.

 

[Bill M]

There used to be a loop hole where you could leave Australia, sign a stat dec and get your super, then come back.
I think they closed that up about 10years ago.

Yeah you are right, the rules were changed in 1998, now no one can access their super until their preservation age. For more info follow this link: http://www.superguide.com.au/accessing-superannuation/accessing-super-early/permanent-departure-from-australia

 

[sptrawler]

A person currently earning 100K pa will receive 9K per year in compulsory super leaving 16K [21% of ordinary wages] of concessional cap to utilise through salary sacrifice if they wish.

Back of the envelope and using the following assumptions:
40 Years of contributions; 3% Inflation; 6%pa Gross dividend; 6%pa Capital Gain.

Directing that 21% of an ordinary wage to super would accumulate 35 times ordinary wages in today’s dollars after 40 years. By changing nothing other than the taxation to marginal PAYE rates the figure drops to 16 times for outside super.

The magnitude of the tax concessions means government tinkering is a risk but the rewards are pretty substantial also. Don’t just look at the risks. The earlier you contribute the less in total you need to contribute to achieve a given outcome. Missing the early generous incentives and the grandfathering arrangements to protect them has been a risk to late accumulators.

My for the case in favour of utilising super structure early.

Agree 90%, your assumptions of 3% inflation, 6% gross dividend and 6% capital growth.
Could be challenged, especially if you lived anywhere else in the world other than Australia.

But I forgot to add in the, it can't happen here factor.

 

[sydboy007]

With the $20B in costs to run the current super system I wonder if it would be easier to just have:

OAP as minimum retirement income

Super directed to a future fund style governance structure that is legislated to have the interests of members front and centre of all decisions. Make it so hard to fiddle with the fund so as to stop the Government looking at the savings in there as a honey pot to be tapped into.

On retirement you will receive OAP + 5-8% of the balance you had accumulated in super till you die. Actual % will need to be determined by actuarial analysis of what is affordable over the long term.

All longevity risk is worn by the taxpayer, but any balance left on your death remains within the fund. Have a system in place so a couple's balance is combined. On the death of one the balance provides the same income to the one still alive.

This system could also help the asset rich cash poor in society by allowing them to use their property as collateral to supplement their income, with the loan repaid when they die or sell the house.

Suppose it goes back to a defined benefit fund in some ways, but it I'd say the Govt could save the system over 90% of it's operation costs as the Norwegians are able to run their SWF with < 0.1% management costs since they do most of it in house. From memory the guy heading up the fund was on the equivalent of a couple of hundred thousand a year. A pittance in the finance world.

I see a major advantage of this system is that the fund can make decisions based on 5-10 year horizons, similar to the big pension funds in the USA and Canada, rather than the constant worry about the last quarter performance.

The way super is at present, no one in able to plan anything in their retirement because you have money go in, then a random number to multiply your savings to give a final figure. Even 1 year from retirment no one can really tell you what that rand multiplier will be.

The Singaporeans have had a similar system in place for over 4 decades with the various Govt run funds. Admittedly the Singaporeans run it in a far more political way than what I want our version. Far prefer we model ourselves along the way of the Norwegians.

 

[sptrawler]

This article probably highlights, how stupid it is to get out of shape about pensioners with $1m in super, as being fat cats that require extra taxing.

http://www.theage.com.au/business/millionaires-snub-taxman-20130506-2j3pr.html

 

[FlyingFox]

This article probably highlights, how stupid it is to get out of shape about pensioners with $1m in super, as being fat cats that require extra taxing.

http://www.theage.com.au/business/millionaires-snub-taxman-20130506-2j3pr.html

I wonder how many of them used the very generous super caps (especially from previous years) to reduce their taxable income....

 

[sptrawler]

I wonder how many of them used the very generous super caps (especially from previous years) to reduce their taxable income....

My guess would be non, why bother paying 15% contributions tax,on a measly $25k, when you can keep it out of super and pay nothing. Or in the case of negative gearing get a tax advantage and access to the assett.

This is the problem when people are fed crap by the government, they swallow it.

 

[sptrawler]

Obviously this thread has lost its shine.
Now the self funded pensioners, are earning less than their minimum drawdown requirement, they probably won't be hit by the goons.lol
Just shows how timing is everything, six months ago, self funded retirees were the unbelievably rich.
Next year the government will be screaming about how much extra they have to pay in pensions. Due to self funded retirees qualifying for more pension.

Funny how for the last few years when interest rates were 5% plus, the government relaxed the drawdown limits by 50% then 25%.

Now interest rates are down to 4% or less the minimum drawdown will probably be increased.

 

[sydboy007]

Got to love it when people still plan to get the pension with this kind of asset base. At what point should you expect to stand on your own?

My husband is 61 and retired. I plan to retire when I reach 60 this year. We live in an apartment worth $1.7million with an outstanding loan of $350,000. Our combined super is $1.2million. Do we have to draw on our super to pay off the loan so we qualify for the aged pension when we turn 65

Read more: http://www.smh.com.au/money/ask-an-...o-apply-cgt-20130910-2th9m.html#ixzz2egFXirIl

The writer advised the couple they're in the top 1% and they still want to get a part pension

The sad fact is they CAN get one.

So what's the point of providing $30B+ in tax concessions to super when even the top 1% will still get access to a part pension?

 

[Judd]

One does have to wonder why a couple at that stage of their lives still have an outstanding debt of $350,000.

Still, even with $850k left in super, at the age they are, they could still draw down a combined tax-free pension of $34,000.

That is probably more than the married rate age pension for a couple who have stuff all in comparison. So yeah, it does appear to be on the generous side of things.

As for me, I am the opposite of a number of posters. I wish to have as little to do with superannuation as possible. More than happy to pay the tax I owe and live very, very comfortably off the rest. I suppose I can lay claim to be more of a self-funded retiree than others as I am not seeking tax concessions.

 

[jmoz]

The pension system in Aus needs a serious shake up. The assets test cutoffs should be at least halved and only those on a full aged pension should be eligible for the Health Care Card (can add up to $4-5,000 in benefits over the course of a year). PPOR should also be included for the assets test above the median or average house price.

I see at least 1 couple a week who are whinging that they are only going to get $80 a fortnight in pension and ‘how am I supposed to live off that??’ meanwhile they are living in a 5x3 on 1200sqm within 1km from Cottesloe beach in Perth (looking at a cool $2m+ there) and $650,000 in a Term Deposit. The most common one is ‘I paid taxes all my life I deserve it’. Yep so I guess the years of education for you and your kids, the visits to the hospital, the roads you drive on everyday etc etc don’t count?

It makes me happy when I see folks on Today Tonight banging on about how sh*t the pension is. It should be. It should be enough to keep you alive, healthy and nothing else. Where is the incentive for people to take a long term view and take responsibility for their own retirement? At the moment we are just seeing 60 year olds hock themselves to the eyeballs for a palace of a PPOR because ‘we will just pay it off with our super and then go on the pension’.

Sorry for the rant but it sh*ts me to tears that I am going to have to subsidise this crap through my own tax dollars for another 40 years.

 

[Julia]

So, jmoz, what is your own plan for retirement? Presumably to be entirely self funded?

When you reach that stage, having made considerable sacrifices in the process, it might just irritate you slightly that some of the people who have had an equal earning capacity have frittered it away and are, in retirement, completely dependent on the age pension.

It might also irritate you that you've made that effort yet can't even access a concession on council rates, electricity, prescriptions etc.

I doubt I'd be the only one occasionally considering that being self funded is not that smart after all.

 

[Judd]

I thought it was a good rant. And your views have merit - a strange statement coming from a Baby Boomer.

It does surprise me the extent to which people deprive themselves of income simply to obtain a pension. I honestly don't understand it. My income last year (share investments; mostly franked dividends) placed me in the 37c in the $ tax bracket, yet I received a refund of close to a $1,000. Cannot see the point of rushing around like a headless chook attempting to minimise income and/or assets so I could receive what would be the equivalent of a tank of petrol each fortnight.

As for shifting assets into super to obtain more when I don't need it, well, that's got whiskers on it as far as I am concerned. No need for trust deeds, accountants, auditors, actuary statements or, shudder, financial advisers.

As an aside, whenever I learn or hear about surveys from ASIC or Financial pararsites that x% haven't sought financial advice, I ask myself if one of the questions posed was "Do you want financial advice?" Bet it weren't.

 

[tech/a]

The pension system in Aus needs a serious shake up. The assets test cutoffs should be at least halved and only those on a full aged pension should be eligible for the Health Care Card (can add up to $4-5,000 in benefits over the course of a year). PPOR should also be included for the assets test above the median or average house price.

I see at least 1 couple a week who are whinging that they are only going to get $80 a fortnight in pension and ‘how am I supposed to live off that??’ meanwhile they are living in a 5x3 on 1200sqm within 1km from Cottesloe beach in Perth (looking at a cool $2m+ there) and $650,000 in a Term Deposit. The most common one is ‘I paid taxes all my life I deserve it’. Yep so I guess the years of education for you and your kids, the visits to the hospital, the roads you drive on everyday etc etc don’t count?

It makes me happy when I see folks on Today Tonight banging on about how sh*t the pension is. It should be. It should be enough to keep you alive, healthy and nothing else. Where is the incentive for people to take a long term view and take responsibility for their own retirement? At the moment we are just seeing 60 year olds hock themselves to the eyeballs for a palace of a PPOR because ‘we will just pay it off with our super and then go on the pension’.

Sorry for the rant but it sh*ts me to tears that I am going to have to subsidise this crap through my own tax dollars for another 40 years.

Typical un informed kid stereo typing.
Those 60 yr. olds like most of us either have lived in the home since it was built 40 yrs ago and $100K (Not the 2 mill its worth).
OR
Have traded their way up to their Mc Mansion over many years.
Few if any would have a 750K Mortgage.

I'm with Julia.
I Pay GST
COMPANY TAX
PAYE TAX
FRINGE BENEFITS TAX
CAPITAL GAINS TAX
PAYROLL TAX.

My taxes over a year would finance a few families.
Over a lifetime a country town.

Your Sh*tted off!

I will have to pay all my medical bills I wont have subsidised pharmaceuticals
Wont get a concession on anything--will never claim a cent from a pension.
I've kept many people employed paying taxes to a government (Any damned Govt) who waste my and your hard earned---and when they are insolvent just print money that you and I would be jailed for if we did it.
Not only that I've paid Work Cover and super from my companies earnings to my employees for 30 yrs
If I wasn't good at what I do and others like me----you and people like you--- wouldn't have 40 yrs to whinge about how tough you have it.

Give me a break!

 

[skc]

One does have to wonder why a couple at that stage of their lives still have an outstanding debt of $350,000.

Because it is cheaper to use debt outside super compared to the return within super.

Borrowing $100k @ 5.2% you pay $5.2k interest, and for investment purpose and highest tax bracket, the after tax cost is $2730 p.a. or there abouts.

Having $100k in super earning just 4% interest in a term deposit gives you $4k income, tax free.

So it can actually be more financially beneficial to pile assets in super and use debt outside of it, depending on the relative after tax cost/return.