Superannuation, the ultimate government cash cow?

[FxTrader]

http://www.macrobusiness.com.au/2013/10/making-superannuation-sustainable/ pretty good read on super

Interesting indeed...

"the widespread push by the wealth management industry for Australians to turn their retirement nest eggs into income streams so that they don’t run out of superannuation too early – either by burning through their retirement savings or living longer than expected."

Just a little to self-serving a push I think. Annuities equal ongoing fees for the parasitic "wealth management" industry.

"The push follows criticism in August from CPA Australia, which argued that a significant number of baby boomers are running-up debts as they head towards retirement, and then withdrawing their super as a lump sum to pay off debts and, rather than invest for income, spending most of the remainder on consumer goods or a holiday before falling back on the aged pension."

True, and why would you not choose this option? Most boomers don't have enough money saved in super to do anything else and plan to draw the aged pension. Pay off debts, no mortgage and adjust assets accordingly. Not a plentiful retirement perhaps but a perfectly adequate one and many see it this way.

"Allowing someone to retire at 60, withdraw their super tax free as a lump sum, use the money to pay down personal debts or consumption, and then go on the aged pension from 65 years of age is crazy. In such instances, the taxpayer is left wearing the cost of superannuation concessions throughout the individual’s working life, and then again once that same individual goes on the aged pension."

A crazy system perhaps, but not for those who plan to exploit it. The Howard/Costello government created this perk and Abbott (Howard's disciple) is unlikely to substantially change it.

Just like the unlimited tax concessions for property investors, trying to roll back the generosity of this policy would cetainly be met with a backlash and severe retribution at the ballot box.

 

[Vixs]

Anyone that is happy to send themselves broke at 65 and rely on the government for hand outs that don't keep up with the true cost of living is an idiot, and time will tell them that. If they speak to me, I'll tell them that today.

All of my clients entering the wealth distribution phase of life have 1 major source of peace of mind: they aren't reliant on politicians for their jam money.

The people I have seen do this are people that had their asset base destroyed by divorce, and needed to take out a new mortgage at say age 50.

The other thing worth noting is that in a low interest rate environment a lot of people are better off contributing to super up until retirement age INSTEAD of paying off their mortgage ASAP. They aren't intentionally 'loading up' debt, but the breakeven point for where concessionally taxed earnings and growth in superannuation is going to outperform the guaranteed, tax free 'return' of paying extra of the mortgage is lower. Some people will be better off 'loading up on debt' and taking a lump sum to repay it.

The most sensible decision for someone living off an income stream and with no future earnings expected is almost certainly going to be to repay all debt and live off what's left, not use your income stream to service debt. That's the scenario being proposed by the forced income stream champions. No 72 year old wants to have a mortgage anymore while they have assets that exceed their liabilities.

The people maxing out credit cards, buying flash cars outside their means and using their line of credit as an ATM circa-2007 are the tiny minority, and are probably making equally stupid decisions in other areas.

 

[sydboy007]

The other thing worth noting is that in a low interest rate environment a lot of people are better off contributing to super up until retirement age INSTEAD of paying off their mortgage ASAP. They aren't intentionally 'loading up' debt, but the breakeven point for where concessionally taxed earnings and growth in superannuation is going to outperform the guaranteed, tax free 'return' of paying extra of the mortgage is lower. Some people will be better off 'loading up on debt' and taking a lump sum to repay it.

Just brilliant. Let them NG with debt to their eyeballs with an I/O loan, then maximise their concessionally taxed super contributions so doubling down on reducing their tax, then take that minimally taxed lump sum, get very creative with the spending and investing of it, and walk out with a part pension and all the associated goodies.

Not sure how much longer this system can work before there's just not enough money to do the basics anymore.

 

[medicowallet]

Not sure how much longer this system can work before there's just not enough money to do the basics anymore.

Oh I can tell you... until the "high income earners" decide it is not worth their time going to work anymore

Until then, there are a lot of Levies or taxes that can be placed on them because sure as heck the greedy bastards don't pay enough tax or make enough sacrifices for their fellow man now do they..


MW

PS I was going to ask some high income friends tonight, but a couple are at work, a couple on call, and the rest asleep. I will get back to the ASF community wrt their answers within the month.

 

[sydboy007]

Oh I can tell you... until the "high income earners" decide it is not worth their time going to work anymore

Until then, there are a lot of Levies or taxes that can be placed on them because sure as heck the greedy bastards don't pay enough tax or make enough sacrifices for their fellow man now do they..


MW

PS I was going to ask some high income friends tonight, but a couple are at work, a couple on call, and the rest asleep. I will get back to the ASF community wrt their answers within the month.

Right. I suppose it depends what you classify as a high income earner?

At 50K you beat 50% and at around 75% you're in the top 25%.

I thought super was mean to provide an income in retirement? Obviously I'm wrong as it's now viewed as tax minimisation scheme where financial advisers are telling their clients to renovate the house and get more govt funded pension.

In 8-10 years there'll be 1 worker less per retiree than today. The pension alone will be somewhere around $55B a year (overall assistance to the aged is already $51B out of a ~$370B budget)

Where does the money come from? A worsening dependency ratio, higher levels of assistance to the aged, and none of the major political parties have thought it's something they need to start preparing for. So far all their decisions seem to be making the situation worse by reducing taxes based on how old you are, just as the boomers really start to hit 60+.

 

[Vixs]

Just brilliant. Let them NG with debt to their eyeballs with an I/O loan, then maximise their concessionally taxed super contributions so doubling down on reducing their tax, then take that minimally taxed lump sum, get very creative with the spending and investing of it, and walk out with a part pension and all the associated goodies.

Not sure how much longer this system can work before there's just not enough money to do the basics anymore.

I wasn't using that as an example of investment debt and property, though that was obviously not clear so I can see where you went with that.

I was talking about not making any more P&I repayments on the family home than required until concessional contributions to super has been utilised to their most effective point.

That was the idea for a rather conservative investor who should be on track to reach their goals.

Your example would be something I could see people doing, but with contribution caps so low the people that would be 'milking' the system like that just can't get enough money into super to do it.

There are a lot of inputs to consider in the 15-20 years before retirement.

 

[Garpal Gumnut]

I've looked at property in my SMSF and decided against it.

I would advise others to hasten slowly on property, it may be cheaper, much cheaper, in 18 months.

ASX is the place to be atm.

And a good way with divis to avoid government taking a cut.

gg

 

[nulla nulla]

I've looked at property in my SMSF and decided against it.

I would advise others to hasten slowly on property, it may be cheaper, much cheaper, in 18 months.

ASX is the place to be atm.

And a good way with divis to avoid government taking a cut.

gg

I agree with you GG. I think there will another financial fallout from the U.S house of cards in the next year or two and property prices will stumble. Property is a very illiquid form of investment. Can be great long term if you are young and have plenty of time but if demand slows, cashing out in a hurry without losing out can be a real problem.

 

[13ugs13unny]

I've looked at property in my SMSF and decided against it.

ASX is the place to be atm.


gg

Someone has seen the light. Agree 100% SMSF is mainly for retirement purposes, and needs to be as liquid as possible. If its held in bricks and mortar, you may not want to wait around for 5-10years for next property boom.

 

[Hodgie]

Someone has seen the light. Agree 100% SMSF is mainly for retirement purposes, and needs to be as liquid as possible. If its held in bricks and mortar, you may not want to wait around for 5-10years for next property boom.

In SMSF like any super fund should be ONLY for retirement purposes.

I think it really depends how much is available within the SMSF, it may be appropriate to diversify into property as part of a larger portfolio.

I have an uncle that had the majority of his super funds on the market a few years back and lost a very significant portion of it during the GFC right before reaching retirement age. There are alot of things to consider with your retirement funds I think saying that having all your funds tied up in the asx as a blanket approach for everyone doesnt really work out.

Also alot of people will be waiting 5-10 years before they acess their super funds anyway.

I have other relatives nearing retirement which are looking at purchasing a property within their SMSF so that once they reach retirement they can sell off the family home and downsize into this other property for retirement.

It needs to be taken into account the fact that when you reach retirement age you may live for 20+ years so your investment timeframe may not nessisarily be a short one. A mix of liquid and illiquid assets may be appropriate depending on how much is in there.

 

[FxTrader]

I have other relatives nearing retirement which are looking at purchasing a property within their SMSF so that once they reach retirement they can sell off the family home and downsize into this other property for retirement.

This may not be an option. My understanding of property acquistion in an SMSF is as follows...

You can only buy property through your SMSF if you comply with the rules. The property...

Must meet the 'sole purpose test' of solely providing retirement benefits to fund members
Must not be acquired from a related party of a member
Must not be lived in by a fund member or any fund members' related parties
Must not be rented by a fund member or any fund members' related parties

When your relatives retire they can sell the property with no capital gains tax attached but moving into their SMSF owned home is a compliance issue.

Other disadvantages include...

- If you borrow to buy property through your super and you’re negatively geared, the tax offset only applies to other income earned within the fund – not your regular income.
- You can’t renovate a property purchased through a SMSF while it is still under a loan.
- There are thousands of dollars in set-up costs and there are sometimes higher fees involved in getting a loan through your SMSF.
- Buying property through a SMSF is generally only suitable for funds with $200,000 in combined funds.

Even so, current evidence suggests SMSF trustees are piling into property at a faster pace than ever.

 

[Hodgie]

This may not be an option. My understanding of property acquistion in an SMSF is as follows...

You can only buy property through your SMSF if you comply with the rules. The property...

Must meet the 'sole purpose test' of solely providing retirement benefits to fund members
Must not be acquired from a related party of a member
Must not be lived in by a fund member or any fund members' related parties
Must not be rented by a fund member or any fund members' related parties

When your relatives retire they can sell the property with no capital gains tax attached but moving into their SMSF owned home is a compliance issue.

Other disadvantages include...

- If you borrow to buy property through your super and you’re negatively geared, the tax offset only applies to other income earned within the fund – not your regular income.
- You can’t renovate a property purchased through a SMSF while it is still under a loan.
- There are thousands of dollars in set-up costs and there are sometimes higher fees involved in getting a loan through your SMSF.
- Buying property through a SMSF is generally only suitable for funds with $200,000 in combined funds.

Even so, current evidence suggests SMSF trustees are piling into property at a faster pace than ever.

As to the moving into the house, they can convert to pension phase and sell the property (to themselves) and pay no tax at all. There are also other options which have minimal tax implications being inside super and owning over 12 months. but yes they would need to remove the property from the SMSF once they reach retirement age. Although they are so close to retirement i dont think its likely that capital gains will be much of an issue anyway.

Im not sure exactly what the LVR of the purchase will be but I know that they do have quite a large nest egg as they both are full time employed (for 40+ years) and 1 of them is on the top marginal tax rate from the income they earn. The recommended 200k will not be an issue. There are tax benefits associated with concessional contributions. Also i beleive they are looking at a smaller place as it will be just for the 2 of them so i dont think the borrowings will be massive. but yes the loss of full tax benefits on interest needs to be taken into account as well as large fees.

I do beleive that the availability of purchasing property through the SMSF may be causing a price bubble if thats what your getting at with the last comment. I think thats another whole debate though. With the possibility of raising compulsary contributions up to 12%, placing more funds into this space it may continue with years to come.

The point i was raising with my provious post is the fact that there is not a 1 suit fits all approach when it comes to retirement. For some people the risk reward trade off isnt there by having a 100% allocation to shares, if another GFC occured alot of people invested heavily into shares have to go back to work. someone may only need to earn 5% p.a. on their retirement funds to live comfortably so why do they need to risk it all? Im not saying this is my situation or im anywhere near retirement im just pointing out the fact that other asset classes apart from aussie shares can be very appropriate inside an SMSF as part of an overall portfolio construction. That is the one and only point i am raising. Property is more then just an investment it has other characteristics especially in retirement, if you plan to live in it for the rest of your life do you care about market price fluctuations as these will never be realised? (other then for what you leave behind)

I myself hold 100% allocation to shares both in and outside super.

 

[13ugs13unny]

In SMSF like any super fund should be ONLY for retirement purposes.

It needs to be taken into account the fact that when you reach retirement age you may live for 20+ years so your investment time frame may not necessarily be a short one. A mix of liquid and illiquid assets may be appropriate depending on how much is in there.

Depends if you can imagine yourself dealing with tenants, real-estate agents, building repairs/issues etc well into your retirement, I think your right if your SMSF is large, but at the end of the day it boils down to generate clean income without any hassle, such as portfolios with outright dividend payments with blue chips and proven stayers.

e.g in 2010 the dividend interim for anz was 52cents 3 years later its 73. about same margins for wbc,nab, - cba interim for the same time period increased by 80 cents. with all this cheap money being lent out ..once tapering starts these bank shares will increase as banks make larger profits from these loans as well and then house prices will taper & cool with higher rates- happens all the time, saw it in the eighties before the 1987 crash, nineties before the dot com crash, then 2007-8 gfc. Now the borrowing cycle has started again because the RBA has finally coerced the spooked 2007-8 post GFC herd to come to the money trough for a drink. Good news for retirees not so good for the herd when it will get sheered once its grown some wool.

IMHO. its an obvious crystal ball. I'm more inclined to think retirees would prefer the cash without the hassle.

 

[Julia]

Depends if you can imagine yourself dealing with tenants, real-estate agents, building repairs/issues etc well into your retirement, I think your right if your SMSF is large, but at the end of the day it boils down to generate clean income without any hassle, such as portfolios with outright dividend payments with blue chips and proven stayers.

e.g in 2010 the dividend interim for anz was 52cents 3 years later its 73. about same margins for wbc,nab, - cba interim for the same time period increased by 80 cents. with all this cheap money being lent out ..once tapering starts these bank shares will increase as banks make larger profits from these loans as well and then house prices will taper & cool with higher rates- happens all the time, saw it in the eighties before the 1987 crash, nineties before the dot com crash, then 2007-8 gfc. Now the borrowing cycle has started again because the RBA has finally coerced the spooked 2007-8 post GFC herd to come to the money trough for a drink. Good news for retirees not so good for the herd when it will get sheered once its grown some wool.

IMHO. its an obvious crystal ball. I'm more inclined to think retirees would prefer the cash without the hassle.

+100. I considered an IP in my SMSF - for about a minute and a half, for all the reasons you list above. Yields are pathetic and no guarantee of capital gain. And just the thought of some tenant ringing at 2am with a plumbing problem would be the last thing I'd want.

I think too many people are getting sucked into buying property at present just because of the low interest rates, often not even stopping to consider the basic arithmetic. There is an astonishing level of the belief "property always goes up and is always a good, solid investment."

 

[Hodgie]

Depends if you can imagine yourself dealing with tenants, real-estate agents, building repairs/issues etc well into your retirement, I think your right if your SMSF is large, but at the end of the day it boils down to generate clean income without any hassle, such as portfolios with outright dividend payments with blue chips and proven stayers.

e.g in 2010 the dividend interim for anz was 52cents 3 years later its 73. about same margins for wbc,nab, - cba interim for the same time period increased by 80 cents. with all this cheap money being lent out ..once tapering starts these bank shares will increase as banks make larger profits from these loans as well and then house prices will taper & cool with higher rates- happens all the time, saw it in the eighties before the 1987 crash, nineties before the dot com crash, then 2007-8 gfc. Now the borrowing cycle has started again because the RBA has finally coerced the spooked 2007-8 post GFC herd to come to the money trough for a drink. Good news for retirees not so good for the herd when it will get sheered once its grown some wool.

IMHO. its an obvious crystal ball. I'm more inclined to think retirees would prefer the cash without the hassle.

Yeah I agree, I would not even consider a property purchase inside SMSF if the balance was not substantial. I wouldnt even bother with starting up an SMSF with a low balance for similar reasons (high fixed costs and the hastle). I guess one advantage of the SMSF is the fact that you can combine your retirement funds to reduce duplicate fees and an overall higher balance.

The Tennant and maintanance issue would only be short term for someone who intends to move into the house once they are able and eligible to take it out of the SMSF.

Im not going to agree or disagree with you on those bank shares discussed above as I was talking about the asset class itself rather than individual stock selection which is another whole debate but the type of stocks you invest in within your SMSF may be more conservate then what you would do otherwise I think thats common. In financial planning a planner would have to do a separate risk profile for someone acting as the trustee of an SMSF as well as them acting on behalf of themselves as an individual for this exact reason.

 

[FxTrader]

As to the moving into the house, they can convert to pension phase and sell the property (to themselves) and pay no tax at all.

I would argue that stamp duty is a tax. If the assessed value of their investment property (potential retirement home) is say $700k, that's ~$40k including fees in VIC - hardly a trivial sum for most retirees. Though there is a one-off concession for pensioners who hold a qualifing concession card. If they don't they would have paid stamp duty twice on the same property if they chose to acquire it from their SMSF.

I do beleive that the availability of purchasing property through the SMSF may be causing a price bubble if thats what your getting at with the last comment. I think thats another whole debate though.

Certainly a debate within the context of this thread. With investors now comprising over 40% of home loan origination, SMSF trustees are playing their part in proping up the market.

 

[Hodgie]

I would argue that stamp duty is a tax. If the assessed value of their investment property (potential retirement home) is say $700k, that's ~$40k including fees in VIC - hardly a trivial sum for most retirees. Though there is a one-off concession for pensioners who hold a qualifing concession card. If they don't they would have paid stamp duty twice on the same property if they chose to acquire it from their SMSF.


Certainly a debate within the context of this thread. With investors now comprising over 40% of home loan origination, SMSF trustees are playing their part in proping up the market.

Yeah I agree stamp duty certainly should be factored in to any property investment decision. Something that cannot be ignored.

Well if the price bubble topic falls within the context of this thread fair enough. Although I do not disagree with you on this one so someone else will have to debate for the other side of that argument.

Also as I said earlier with the possibility of compulsary super contributions moving up to 12% could lead to even more funding inside this space so is there a chance this bubble will expand?

I have no intention of being a property owner in the current market so it doesnt bother me either way. Just something other people may be considering.

 

[sydboy007]

Yeah I agree, I would not even consider a property purchase inside SMSF if the balance was not substantial. I wouldnt even bother with starting up an SMSF with a low balance for similar reasons (high fixed costs and the hastle). I guess one advantage of the SMSF is the fact that you can combine your retirement funds to reduce duplicate fees and an overall higher balance.

I used to believe that the costs of running an SMSF were high, but they don't have to be.

the budge SMSF administrators like esuperfund have a fixed annual that covers them doing your audit and associated admin work.

I had about $146K when I set up my SMSF with esuperfund. The first year audit is free, so all i was up for is to set up a company since I'm a single trustee which was $465.

From the following years I pay a $44 fee to ASIC, $699 to esuperfund, and an ATO fee of $2XX. Basically I should have a relatively fixed cost of approx $1000 pa. No more fees based on the size of my asset base.

I like the control, and have always had a financial interest so being involved with my super is not a chore.

 

[Hodgie]

I used to believe that the costs of running an SMSF were high, but they don't have to be.

the budge SMSF administrators like esuperfund have a fixed annual that covers them doing your audit and associated admin work.

I had about $146K when I set up my SMSF with esuperfund. The first year audit is free, so all i was up for is to set up a company since I'm a single trustee which was $465.

From the following years I pay a $44 fee to ASIC, $699 to esuperfund, and an ATO fee of $2XX. Basically I should have a relatively fixed cost of approx $1000 pa. No more fees based on the size of my asset base.

I like the control, and have always had a financial interest so being involved with my super is not a chore.

Fair point, that is quite cheap indeed. Cheaper then I would have thought. That brings to question why the recommended amount is $200,000+ for an SMSF. I would pay higher then that with my fund as a percentage of my balance and my investment options are much more limited.

 

[13ugs13unny]

Yeah I agree stamp duty certainly should be factored in to any property investment decision. Something that cannot be ignored.

Well if the price bubble topic falls within the context of this thread fair enough. Although I do not disagree with you on this one so someone else will have to debate for the other side of that argument.

Also as I said earlier with the possibility of compulsary super contributions moving up to 12% could lead to even more funding inside this space so is there a chance this bubble will expand?

I have no intention of being a property owner in the current market so it doesnt bother me either way. Just something other people may be considering.

Same here. I just don't get moving SMSF's into property. As per ato rules you can't directly benefit from super fund real-estate prior retirement, ultimately the capital gains would be far more tax if your intentions were to sell it - than tax free super after 60 years of age? Unless you passionately love that much that its bricks & mortar purchase to become your end of days coffin where mobility starts to decline, prior real coffin another 10-20k which in that case doesn't matter - or does it? Maybe the final conveyor belt ride to the furnace to save a few bucks is your cup of tea, but hey what are super-funds for? Tongue in cheek, to hell with it buy that 99 year lease at your local cemetery and take property purchasing to the grave!!

I think those investing their super into property just might be shooting themselves in the foot. IMHO your better off private borrowing outside your super if you want to go risk into property & leaving SMSF alone so that if you 'fall over', your super wont fall over with you, and if your property risk purchase is funded outside your super and is a success by the time you retire and want to cash in you can have your cake as well - if not rents will likely cover it for you anyway.

therefore unlikely bubble to be had here and its just those that think emotionally and have a passion for real estate, nothing wrong with that either.

its just an opinion, best seek professional advice.