Superannuation, the ultimate government cash cow?

[Julia]

No I wouldn't, just hate young people telling me how much money is enough.
They will be just as annoyed as me when they become self funded and some young person is telling them they have had it easy.

Equally some not so young person casting aspersions on how that self funded income should be spent.

True in my experience as well, yet many elderly property millionaires expect to be paid an age pension as an entitlement and live a subsistence lifestyle in their multi-million dollar homes. Watching 92yo Zara Grayspence on SBS Insight last night telling a national audience why she deserves to receive a government pension while living in a 2 million dollar home in Mossman was revealing. Zara could live quite comfortably on a reverse mortgage yet chooses to live below the povery line on an age pension out of ignorance of other options or in spite of them. Incredibly many people on Facebook, ignorant of Zara's options, believe she is entitled. This notion of universal entitlement to a government pension for property millionaires by many should be a real concern for an aging society.

Seems the entitlement philosophy is alive and well across all age groups. I turned it off after multiple assertions from that young bloke who insisted he should have the right to remain on Newstart for as long as it took to find the exact IT job he wanted. With an attitude like that, the taxpayer would be funding him for a pretty long time.

I like the idea of recouping the pension paid from the estate in these situations. It means those that want to stay in their expensive property because it is their HOME with all the sentiment attached can do so and don’t need to worry about any complexity of entering the private market for reverse mortgages etc.

Good idea. About a year ago, amongst discussion of the family home being taken into account above a certain level, say $1million, the idea was floated that the resulting diminished age pension entitlement could be supplemented by a loan via Centrelink, to be paid off when the person dies. So a reverse mortgage, but without the need to use a commercial lender and presumably at a fixed rate.
How would this be? Any reason why it wouldn't be a useful solution?

Those whose primary purpose is to maximise intergenerational wealth transfer whilst living off the pension will be thwarted. (from my observations this is a large and sometimes sad driver of why many people stay in large and inappropriate housing in their old age – Its probably more about being selfless for their kids benefit then gaming the pension for their own sake but if it wasn’t possible a lot of older people may make different decisions for themselves)

I expect that's right which is a sad commentary on human nature.
How much of a problem is this in real terms, i.e. are the numbers of people owning very expensive property and accessing full pension high? I have no idea about this.

Of those who had made contributions, 55% had received all or part of their superannuation funds as a lump sum payment (54% of men and 57% of women).

We don't know from that what sums were involved. From memory, most people reaching retirement now and in even the next decade will have very small amounts of Super, so for about half of them to take it as a lump sum to pay off their mortgage seems pretty reasonable to me.

Surely a simple restriction on the amount able to be taken as a lump sum and the proviso that the balance be taken as an income stream would solve this?

Many of those who received a lump sum payment used it to pay off or improve their existing home or purchase a new home (32% of men and 31% of women) or to buy or pay off a motor vehicle (14% of men and 11% of women).[/I]

Again, that seems to me a pretty reasonable way to approach retirement when finances will probably be tighter than when working. Why would you not want to stop paying interest on loan for house and/or car?

Pretty much the MSM is full of tips on how to milk the super system. Whether it's re-contribution schemes to use transition to retirement pensions to increase concessional contributions via receiving tax free super income, or how to spend a bit of money tarting up the house so as to get more pension.

As has already been noted, you use pejorative language to describe what people have a perfect right to do with their own money. Just unnecessary and unfair. We seem to have all agreed that inclusion of at least part of the family home in the assets test would redress some of the present inequity.

 

[sptrawler]

We don't know from that what sums were involved. From memory, most people reaching retirement now and in even the next decade will have very small amounts of Super, so for about half of them to take it as a lump sum to pay off their mortgage seems pretty reasonable to me.

Surely a simple restriction on the amount able to be taken as a lump sum and the proviso that the balance be taken as an income stream would solve this?.

There is already a provision in the SIS act to allow a tax free removal of $180,000 of the taxable component (indexed). This rule has been around a long time and was put in place to allow people to settle their affairs on retirement.

https://www.ato.gov.au/rates/key-superannuation-rates-and-thresholds/?page=6

Again, that seems to me a pretty reasonable way to approach retirement when finances will probably be tighter than when working. Why would you not want to stop paying interest on loan for house and/or car?
.

I agree, it would be stupid to commence retirement and not pay off outstanding loans, if possible.

 

[sydboy007]

I expect that's right which is a sad commentary on human nature.
How much of a problem is this in real terms, i.e. are the numbers of people owning very expensive property and accessing full pension high? I have no idea about this.

Pretty much any pensioner within 30KM of an east coast capital city CBD would have a valuable house. In Sydney the median is 678k. The Australian weighted average median house price is now $606,500. Generally the older a person is the more likely they own an above average valued house purely because they were able to buy low well before the boom.

We don't know from that what sums were involved. From memory, most people reaching retirement now and in even the next decade will have very small amounts of Super, so for about half of them to take it as a lump sum to pay off their mortgage seems pretty reasonable to me.

So is super for providing a retirement income, and help to reduce the costs of the aged pension, or to be used as a person pleases?

Surely a simple restriction on the amount able to be taken as a lump sum and the proviso that the balance be taken as an income stream would solve this?

There was a system in place up to 2007. It was called the Reasonable Benefits Limit. The Howard Government removed this and basically allowed all super to be take tax free as a lump sum, as well as allowing the accumulation of millions within super where earnings and capital gains are tax free from age 60.

Again, that seems to me a pretty reasonable way to approach retirement when finances will probably be tighter than when working. Why would you not want to stop paying interest on loan for house and/or car?

So a person receives large amounts of tax expenditures for saving within super but then can spend as much of it as they please and still expect to receive a full pension. How is that fair on the remaining tax payers?

As has already been noted, you use pejorative language to describe what people have a perfect right to do with their own money. Just unnecessary and unfair. We seem to have all agreed that inclusion of at least part of the family home in the assets test would redress some of the present inequity.

A large amount of a person's super balance is due to the concessional tax treatment, so is it fair they can choose to spend all of it as they please and then get a full pension? Shouldn't the rest of tax payers have some say in how that super balance should be used to minimise the cost of the aged pension?

Why are remaining tax payers penalised for someone choosing to not pay their mortgage off before retirement, or fund a new car or holiday after retirement?

I agree, it would be stupid to commence retirement and not pay off outstanding loans, if possible.

The question is why do they have these debts when they retire. Why should tax payers subsidise their decisions?

-----------

The way I see it, the super system is broken

It costs over $30B in tax expenditures, the retail / industry super funds cost over $18B a year in fees, the SMSF and corporate funds would probably add another $4-5B to that figure. The Norwegians are able to run their SWF which has about 50% of assets as compared to the Australian super system, but they are able to manage it at a < 0.2% MER. What are we doing wrong? The tax expenditures are growing at 12% a year, and that rate will increase as more and more people are able to stop paying tax on their super. The fees taken by the super industry will continue to grow exponentially while the FUM model is used.

Then we have the sad fact that there's no legal requirement for people to actually use their super to reduce their aged pension requirements. So we're costing ourselves something over $50B annually to reduce the cost of the aged pension of $35B. I'm not sure how sane that is.

 

[sptrawler]

The question is why do they have these debts when they retire. Why should tax payers subsidise their decisions?
.

Well Syd, they are probably the low income earners you are constantly championing, oh you must have forgotten.

 

[sptrawler]

There was a system in place up to 2007. It was called the Reasonable Benefits Limit. The Howard Government removed this and basically allowed all super to be take tax free as a lump sum, as well as allowing the accumulation of millions within super where earnings and capital gains are tax free from age 60.
.

Syd, when RBL's were stopped the limit was $1.238,440 .
You suggested a limit of $1,000,000 would be reasonable today?

So nearly 10 years later, you think a lesser sum is reasonable. I think you're unreasonable, or maybe have an agenda?

Read the next post, you talk about 12% growth, your suggestion goes backwards about 15 years and ou think Abbott's lost the plot.lol

 

[sptrawler]

Go for it. At least with RBLs there's a chance income taxes can be reduced because the super tax expenditures aren't growing at 12% a year. I doubt there's any other part of the budget growing at that rate.

600K at 5% interest is 30K. The single aged pension is 19916 - 50% increase over the aged pension ain't a bad deal. 5% on 1M is 50K. The couple aged pension is 30K - 66% increase.

The pension is guaranteed and indexed.

At the moment guaranteed term deposits are getting 3.5%, let's use actual figures.

$600k at 3.5% $21k. 10% increase over age pension
$1m at 3.5% $35k. 17% increase over age pension

No indexation.

You're talking #############

 

[Wysiwyg]

You're talking #############

Thankfully those hare-brained ideas will never go beyond this thread. Depriving people some semblance of life enjoyment in their later years would start riots.

 

[sptrawler]

Thankfully those hare-brained ideas will never go beyond this thread. Depriving people some semblance of life enjoyment in their later years would start riots.

I wasn't meaning to be provocative.
But when someone suggests it is reasonable, that you get the same outcome if you spend all your money, or save it.
I find that a bit off.

One could say," but they still have the capital", conversely the ones on the pension, "have allready spent their capital".

I'm talking about the 500,000 self funded 'normal people', not the 1.700 'fat cats' that are rorting the system.

When we talk super everyone focuses on the minority rorting, when we talk welfare they say don't focus on the minority that are rorting.
Talk about selective choices.lol

 

[Wysiwyg]

I wasn't meaning to be provocative.
But when someone suggests it is reasonable, that you get the same outcome if you spend all your money, or save it.
I find that a bit off.

One could say, but they still have the capital, conversely the ones on the pension have allready spent the capital.

1)No doubt there has to be a strict cut-off point for pension entitlement. People will take the free money if they can legally get it.
2)The money people have in their super gets churned through the system again when accessible.
3)Removing incentives to build a larger retirement fund is d.u.m.b.
4)If retirees blow their super (wealth exchanging hands) then a meager pension is all they deserve.

When we talk super everyone focuses on the minority rorting, when we talk welfare they say don't focus on the minority that are rorting.
Talk about selective choices.lol

Yes that is what gets one's goat.

 

[sydboy007]

Syd, when RBL's were stopped the limit was $1.238,440 .
You suggested a limit of $1,000,000 would be reasonable today?

So nearly 10 years later, you think a lesser sum is reasonable. I think you're unreasonable, or maybe have an agenda?

Read the next post, you talk about 12% growth, your suggestion goes backwards about 15 years and ou think Abbott's lost the plot.lol

The pension is guaranteed and indexed.

At the moment guaranteed term deposits are getting 3.5%, let's use actual figures.

$600k at 3.5% $21k. 10% increase over age pension
$1m at 3.5% $35k. 17% increase over age pension

No indexation.

You're talking #############

Then can you give me an explanation that shows how a super system with:

* $30B in tax expenditures - cost growth of 12% a year
* Around $23B in management fees a year - growing due to the FUM model
* tax free super with a falling participation rate and stagnant tax base (when excluding income and company profits)

is sustainable.

I believe a couple in retirement able to generate $50K a year should have a comfortable life. I don't believe my taxes should be higher to help them achieve any more than that within the minimally taxed super environment. The Association of Superannuation Funds of Australia estimates a ‘comfortable‘ living standard requires an income of about $1,000 a week. To generate this income, you need about $670,000 as a lump sum - note I believe that income level on the capital would require too high a risk hence why I feel $1M for a couple is fair. To put that into perspective the ABS income deciles are in the below chart. A 52K tax free income puts you well into the top half of household income. Note they are gross values, so 52K tax free for a couple is probably into the 6th decile, and considering the money is supporting just 2 people, they're even better off again, especially if they're mortgage free.

What is the maximum income you believe someone is entitled to get Government support to achieve? Are you proposing being more well off than 50-60% of households ain't enough?

I think this argument would be easier to understand if super statements had contributions and earnings taxed at full marginal rates, with a rebate section from the Government showing how much Government support you received in the year via the super tax expenditures to get the tax rate back to 15%.

If you're only achieving 3.5% on your money then I'd say either get some advice or sack the person providing you the advice. There's quite a diversity of low risk options that would provide a minimum 5% yield. The bonds within my SMSF achieved over 6%, the hybrids over 7%. A portfolio made of CIB and IAB would provide the protection against inflation with the cash flow required for living expenses. Current options are still providing around 6% yield when combined in this way.

So the actual figures for a competent investor would be:

600K at 6% = 36K or roughly 14K over the single pension or > 50%
1M at 6% = 60K or roughly 28K over the couples pension or just under 50% increase

Every quarter the income increase with the CPI, so real purchasing power is maintained over the life of the bonds. It's quite easy to set up, and there's no running costs to this option. You generally sit at the top of the capital tree, so should be the last to suffer a loss should anything go wrong with the underlying companies. The below table from S&P shows how unlikely you are to loose money IF you the bond you purchase has an investment rating.

 

[craft]

I think this argument would be easier to understand if super statements had contributions and earnings taxed at full marginal rates, with a rebate section from the Government showing how much Government support you received in the year via the super tax expenditures to get the tax rate back to 15%.

Its notional revenue not raised - not expenditure.

If there was no super pool their would be no revenue at all from Super. Would the savings pool exist in some other fashion? Maybe but probably no where near as large and it would still be undoubtedly sheltered some other way like negative gearing, main residence exemption from Capital Gains, family trusts, corporate structures, tax haven accounts etc.

So a notional revenue forgone figure is riddled with fairy-tale assumptions.

Can't isolate super and try to fix it - the approach has to be comprehensive.

 

[sydboy007]

Its notional revenue not raised - not expenditure.

If there was no super pool their would be no revenue at all from Super. Would the savings pool exist in some other fashion? Maybe but probably no where near as large and it would still be undoubtedly sheltered some other way like negative gearing, main residence exemption from Capital Gains, family trusts, corporate structures, tax haven accounts etc.

So a notional revenue forgone figure is riddled with fairy-tale assumptions.

Can't isolate super and try to fix it - the approach has to be comprehensive.

Very true. NG needs to be fixed, halving CGT removed, expedite the G20 to coming up with a solution on large companies siphoning billions in profits out of Australia and not paying tax.

Fix the super taxes along with meaningful tax reform is the only way forward. We over tax hard work and encourage too much speculation - hence why since the GFC nearly 95% of new bank lending has been to housing. That does not help to create or sustain a globally competitive economy.

 

[craft]

We over tax hard work and encourage too much speculation

I'm not sure I would just single out 'speculation' I would say labour carries far more tax burden then capital and given the current persuasion of political power I can't see that changing with a tax review. Some re-jigging for efficiencies but the overall burden is likely to go even further in favour of capital - That is pretty evident Liberal Ideology and we live in a democracy so I presume that is what the majority voted for.

 

[Junior]

I don't think our super system is that bad with regard to ongoing costs....there's so much choice. There's 100s of different retail and industry platforms to choose from, all with different fee structures, investment and insurance options.

If you set up a SMSF you can invest in almost anything. Ongoing costs can be as low as around $1,000 pa. Not bad if you are approaching retirement and have combined super of >$500k.

The costs are only as bad as you allow them to be, there are cheap options. The average MER is pushed up by the amount of FUM sitting in old and expensive retail platforms, some of the newer products are much cheaper.

A major issue is that most of the working population has neither the knowledge or desire to shop around and make sure they are getting a good deal. If that happened it would encourage more fierce competition re costs.

 

[Julia]

A major issue is that most of the working population has neither the knowledge or desire to shop around and make sure they are getting a good deal. If that happened it would encourage more fierce competition re costs.

+1. The apathy demonstrated by most people regarding their Super is quite incomprehensible to me.

The other factor, however, is the lack of trust in the financial advice industry. Nothing personal, Junior, of course.
Disasters like the rogue planners at CBA, Storm, etc have understandably shaken people's confidence in seeking advice.

And unless your average Australian is prepared to acquire at least some basic financial literacy they will simply not know what they don't know and are therefore not in a position to evaluate the worth or otherwise of any advice they may be offered.

 

[Duckman#72]

And unless your average Australian is prepared to acquire at least some basic financial literacy they will simply not know what they don't know and are therefore not in a position to evaluate the worth or otherwise of any advice they may be offered.

That is a very important point Julia. The only thing the majority of investors and fund holders understand and focus on is cost. It is a dangerous concept to compare financial advice based on fees alone.

You can get a bargain basement SMSF for low $$$ but you get what you pay for. I recently met with a new client who had a SMSF set up with low cost "experts" with a high profile in the media who had to pay $40,000 tax because their advisors told them to transfer BHP shares from their own name into their fund. Great idea - except for the personal capital gain! But at least the fund was set up for $500 and the administration, accounts and audit for the first year was only $1000! Bargain? You be the judge.

Duckman

 

[Macquack]

+1. The apathy demonstrated by most people regarding their Super is quite incomprehensible to me.

Sorry Julia if I am picking on you today, but a lot of people simply don't have the luxury of being retired to have the time to even comprehend the concept of superannuation.

 

[k.smith]

+1. The apathy demonstrated by most people regarding their Super is quite incomprehensible to me.

The other factor, however, is the lack of trust in the financial advice industry. Nothing personal, Junior, of course.
Disasters like the rogue planners at CBA, Storm, etc have understandably shaken people's confidence in seeking advice.

And unless your average Australian is prepared to acquire at least some basic financial literacy they will simply not know what they don't know and are therefore not in a position to evaluate the worth or otherwise of any advice they may be offered.

The problem imo is much more complex than being a case of apathy. Evidence suggests that there are a lot of Australians who don't even know the meaning of words such as " incomprehensible".


http://www.abs.gov.au/ausstats/abs@... of literacy and numeracy (Media Release)~200


''....ABS Director of the National Centre for Education and Training Statistics, Andrew Webster, said the recent PIAAC survey assessed people's literacy and numeracy skills and their ability to solve problems in technology-rich environments.

"The survey measures participants on a scale of one to five, one being the lowest and five being the highest," he said.

"The survey found that 44 per cent of Australians aged 15 to 74 (7.3 million) had literacy skills at levels one or two, a further 39 per cent (6.4 million) at level three and 17 per cent (2.7 million) at levels four or five.

"For numeracy skills, 55 per cent of Australians (8.9 million) were assessed at level one or two, 32 per cent (5.3 million) at level three and 13 per cent (2.1 million) at levels four or five....''


To acquire basic financial literacy it seems to me that one first needs to achieve some reasonable literary and numeracy skills, which is not achievable overnight. This is a major reason why I believe that any watering down of the FOFA reforms would expose many investors and superannuants to a new round of risk and potential losses. Education may be the answer, but it's going to have to start in the school classroom. Too many entrants to the "University of Finance" do not seem capable of passing the entrance exam, let alone achieve a degree that helps them identify the many perils of investing their hard-earned.


http://www.smh.com.au/business/retirees-fight-fofa-reforms-20140328-35oi2.html

''....Ian Silk, the chief executive of 2-million-member industry fund AustralianSuper, said Australian Bureau of Statistics data showed almost half the adult population had low levels of literacy and numeracy. They needed strong protections, he said. ''The purpose of a commission is to reward a person for selling a product which may be entirely different from advising them to purchase the best product for them,'' he said. Industry funds have never paid commissions to financial advisers.

But it is not just the proposed amendment that allows conflicted pay on general advice that is opposed by seniors' groups and consumer groups such as Choice. They are opposed to the proposed amendment of the FOFA reform that puts planners under a legal obligation to act in their clients' best interests. They say the amendment risks reducing legal obligation to ''tick box'' compliance. Seniors' groups are also opposed to the amendment that drops the ''opt-in'' requirement. This is where the planner has to obtain the client's written consent every two years for the relationship to continue. Opt-in is designed to deal with the situation where planners could receive ongoing fees and not provide any advice. Another of the government's amendments limits FOFA's annual disclosure of fees to those who became clients of planners from the middle of last year.

Mr Silk said that Labor's reforms were negotiated over about two years. ''FOFA was already a compromised outcome,'' he said. Mr Silk said even though Labor's FOFA was a negotiated compromise, it still achieved a better balance as it is than it would if the government's amendments went ahead....''

 

[Julia]

Sorry Julia if I am picking on you today, but a lot of people simply don't have the luxury of being retired to have the time to even comprehend the concept of superannuation.

I don't feel picked on, Macquack. You're entirely free to raise any point you want to.
I will, however, totally disagree with the premise of your suggestion. I recognised the need for financial literacy many years before being retired in my late 40s. Worked long hours, and way before the huge advantage of the internet meant everyone could access good education.
It has nothing to do with being retired or not.

Further, people who have had not much formal education can and often do learn the necessary skills of how to protect capital and invest reasonably safely. How hard is it to buy, e.g. shares in well known companies of proven profits and good management, such as most of the big banks, Woolworths, etc? Most 'ordinary Australians' can do this. Even schools use the ASX sharemarket game as a teaching tool.

People can't comprehend the concept of superannuation???? Really? You must assume your fellow Australians to be way more dim than most of them are. Are you seriously telling me that you think most people do not understand that they are compulsorily contributing to a scheme which is designed (if the rate is high enough and they participate long enough) to provide them with an income in retirement when, just fancy this, your income from your job actually stops?

The problem imo is much more complex than being a case of apathy. Evidence suggests that there are a lot of Australians who don't even know the meaning of words such as " incomprehensible".

OK, so what? They don't need to have a sophisticated vocabulary to understand the concept of Super as expressed above in my response to Macquack.

On apathy, I have mentioned several times before many well educated people I know, some with PhDs, who are financially illiterate. They acknowledge this, yet decline to do anything about it. Tell me that's not apathy.

You do not need to convince me of the woeful standard of literacy and numeracy in Australia. I've been a voluntary tutor in adult literacy for about 15 years in an attempt to make some contribution to improving this in a small way.

It's the failure of the education system when for several years they messed about with dispensing with basics and embracing nonsense like whole word/whole sentence recognition in really little kids who just need simple phonics at that stage.
It will not get better quickly because many of those children are now today's teachers, god help us.

To acquire basic financial literacy it seems to me that one first needs to achieve some reasonable literary and numeracy skills, which is not achievable overnight. This is a major reason why I believe that any watering down of the FOFA reforms would expose many investors and superannuants to a new round of risk and potential losses. Education may be the answer, but it's going to have to start in the school classroom. Too many entrants to the "University of Finance" do not seem capable of passing the entrance exam, let alone achieve a degree that helps them identify the many perils of investing their hard-earned.

I agree entirely that the watering down of the reforms should not happen.
When I first heard, I think amongst the enquiry into Storm Financial, that it was proposed in future
that financial advisers should be obliged to act in the client's best interest, I just couldn't believe it.
I'd have believed without question that that would be the 100% expectation with which one would consult a financial adviser. I have since been sadly disabused of that idealistic and naive belief.

 

[Julia]

Sorry Julia if I am picking on you today, but a lot of people simply don't have the luxury of being retired to have the time to even comprehend the concept of superannuation.

Macquack, just a PS to my earlier response: if you wait until you're retired to think about superannuation you've rather missed the bus, haven't you?