Superannuation, the ultimate government cash cow?

[Judd]

...........
The only reason I raised the matter of fees was that you and I have both likely seen people that are not looking after their clients as much as they're looking after themselves. Some of these people are not deserving of the trust vested in them or the fees they collect. A simple question as to how their fees are calculated can help people smell a rat, because again, if someone is embarrassed about how much they're being paid when quizzed on it, it's likely because they know they're being paid too much.

This is all well and truly off topic now, so if anyone would like clarification I will respond by PM, or if there was a separate thread I'd contribute to that.

Back to your regularly scheduled class warfare.

Hmm, maybe. The 7% commission charged by Storm Financial didn't seem to deter participation unfortunately. I suppose one factor could be the level of front the sales personnel put on. The smiling shark syndrome.

However, yes, financial planners should be prepared to openly discuss their fees as it is the clients who finally pay.

 

[k.smith]

Firstly, I pay tax on the taxable component of my SMSF pension as I am under 60, it does qualify for a 15% offset.
I don't pay any tax on the taxfree component of my pension, as the funds were put in as after tax contributions.
So it is a furphy saying after $50k, you should pay tax. What if all the pension comes from after tax contributions, as opposed to concessionally treated contributions.



That's all well and good if the person is working, and can add extra to it, what if they are drawing a pension?

If currently the cap was $1m giving a return of 3.6%, that would mean $36k income, as opposed to a Government pension of $32k.
The only way the majority of "normal" people, can get sort of money into super, is by putting in after tax dollars. This could be done by downsizing, selling investments or just doing without and putting as much cash as you can in.......''

http://www.superannuation.asn.au/media-release-3-july-2014

''Amidst ongoing public debate regarding the equity of superannuation tax concessions, a report released by the Association of Superannuation Funds of Australia (ASFA) today provides a clear picture of where superannuation tax concessions flow. 'The report found that the tax concessions applied to concessional superannuation contributions are not significantly skewed towards high-income earners, and, in fact, support the bulk of the working community to save for their retirement.

Based on an analysis of superannuation contributions and tax concessions by taxable income bracket, around 75 per cent of the tax concessions applied to contributions go to those paying either the 30 per cent or 38 per cent marginal tax rate.

However, the report also found that, when it comes to the tax concessions applied to superannuation investment earnings, a large portion of tax concessions flow to middle-to-high-income earners, with 65 per cent flowing to those earning over $80,000, and 23 per cent to those with a taxable income of more than $180,000.

ASFA CEO Ms Pauline Vamos says that development of public policy regarding the equity and sustainability of the superannuation system must be based on sound assumptions and facts.

“This report clearly shows that when it comes to the tax concessions applied to superannuation concessional contributions, the majority flow to those in the middle-income bracket, who make up a large part of the Australian workforce.

“This provides evidence that the contribution caps, which have been lowered substantially over the past few years, are working to reduce the concessional contributions made by upper-income earners, while continuing to provide support to the majority of Australians to help them save for their retirement.”

Notwithstanding this, Ms Vamos says there are various policies that could be adjusted to increase the equity of the system.

“While tax concessions are a very important feature of our superannuation system, once people have accumulated more than enough money to fund a comfortable lifestyle in retirement, they no longer require government assistance. With this in mind, there are a number of ways government policy could be adjusted to make sure that people are using superannuation for retirement purposes, and not as a wealth accumulation tool.”

The report makes a number of recommendations in this area, including applying a lifetime cap to non-concessional contributions, and looking at ways to remove the concessional tax treatment for very high superannuation balances in excess of $2.5 million.

“This would help ensure that people are using superannuation as a means to provide enough income for a comfortable retirement, and not for wealth accumulation or estate planning purposes,” says Ms Vamos.
....''

What do you think about the recommendation of capping at $2.5million?

 

[sptrawler]

http://www.superannuation.asn.au/media-release-3-july-2014

''Amidst ongoing public debate regarding the equity of superannuation tax concessions, a report released by the Association of Superannuation Funds of Australia (ASFA) today provides a clear picture of where superannuation tax concessions flow. 'The report found that the tax concessions applied to concessional superannuation contributions are not significantly skewed towards high-income earners, and, in fact, support the bulk of the working community to save for their retirement.

Based on an analysis of superannuation contributions and tax concessions by taxable income bracket, around 75 per cent of the tax concessions applied to contributions go to those paying either the 30 per cent or 38 per cent marginal tax rate.

However, the report also found that, when it comes to the tax concessions applied to superannuation investment earnings, a large portion of tax concessions flow to middle-to-high-income earners, with 65 per cent flowing to those earning over $80,000, and 23 per cent to those with a taxable income of more than $180,000.

ASFA CEO Ms Pauline Vamos says that development of public policy regarding the equity and sustainability of the superannuation system must be based on sound assumptions and facts.

“This report clearly shows that when it comes to the tax concessions applied to superannuation concessional contributions, the majority flow to those in the middle-income bracket, who make up a large part of the Australian workforce.

“This provides evidence that the contribution caps, which have been lowered substantially over the past few years, are working to reduce the concessional contributions made by upper-income earners, while continuing to provide support to the majority of Australians to help them save for their retirement.”

Notwithstanding this, Ms Vamos says there are various policies that could be adjusted to increase the equity of the system.

“While tax concessions are a very important feature of our superannuation system, once people have accumulated more than enough money to fund a comfortable lifestyle in retirement, they no longer require government assistance. With this in mind, there are a number of ways government policy could be adjusted to make sure that people are using superannuation for retirement purposes, and not as a wealth accumulation tool.”

The report makes a number of recommendations in this area, including applying a lifetime cap to non-concessional contributions, and looking at ways to remove the concessional tax treatment for very high superannuation balances in excess of $2.5 million.

“This would help ensure that people are using superannuation as a means to provide enough income for a comfortable retirement, and not for wealth accumulation or estate planning purposes,” says Ms Vamos.
....''

What do you think about the recommendation of capping at $2.5million?

So the system is working, most of the tax concessions on contributions are given to those on the 30 - 38% tax bracket 'normal workers'.

The paragraph you highlighted, is common sense, the highest account balances are going to make the highest earnings.
As I said those 'normal' people with high account balances, have put the money in with after tax dollars.

I agree completly with the last paragraph, it just has to be realistic caps, as life expectancy grows the money has to last longer.

There is no point in having caps that forces everyone on welfare by the time they are 75. I would think $2.5m is reasonable, but I'm no expert.

I remember when I was in my mid 20's, I thought $300k would be enough, houses were about $50k.
Then in my mid 30's I thought $600k was enough, houses were about $120k.
Now in my late 50's, I think $2.5m is o.k, houses are about $500k.

The economy is very much geared toward the cost of housing, as it is the major cost of living outgoing. What is left over is disposable income, that is all that's left for everyone else to get a piece of.

So if the cost of housng plateaus for a reasonable period of time, the value of the capital will be sustained.
If housing keeps going up, wages will follow and the value of the lump sum is eroded.
That is not even taking into account currency, interest rate and market fluctuations, let alone tax changes and government tampering.

There are some knowledgeable guys on this thread, who would have a much better idea than me, as to what cap would be appropriate.

 

[sptrawler]

Another furphy that some would have us believe.

People are taking lump sums from their super 'blowing it' to get a pension.

It is a crock of you know what.
Nine years ago, APRA statistics recorded that retirees took about twice as much in lump sums as pensions. Yet the total amounts being taken as pensions or lump sums have been almost neck-to-neck for about the past four years.

This is the second consecutive year where pensions have outstripped lump sums. And it is part of an important long-term trend in which many more retirees appear to recognise the long-term tax and retirement-income attributes of super pensions.

Interestingly, members of self-managed funds have been by far the leaders of the trend to favour pensions over lump sums.

The current Superannuation Market Projections report, published late last year by Rice Warner Actuaries, estimates that just 3 per cent of SMSF members take their super as a lump sum

I for one, get fed up with young people making erroneous sweeping statements, to support their drive for higher super taxes, to support their drive to lower their personal tax.

 

[sydboy007]

If the below ATO figures are correct then that means based on a $1.8T super funds base

* 2% of accounts hold ~ $540B in assets

* 10% of accounts hold ~ $1T in assets

* remaining 90% of accounts hold ~ $720B in assets

Certainly shows how lopsided the super system is.

Based on the income deciles, it's also plain to see where the tax expenditures are going, and it's not really targeted at minimising future pension liabilities.

 

[sydboy007]

I for one, get fed up with young people making erroneous sweeping statements, to support their drive for higher super taxes, to support their drive to lower their personal tax.

Of course. Why would someone near or over 60 years want to see change in tax free super when it's possible to have an 80K super pension tax free and in the last FY earn another 20.5K outside super tax free as well when using the LITO.

Golly gosh, a $100K income and not a cent to pay in tax. Shame on those PAYG tax slaves wondering how they'e supposed to fund everything with a declining participation rate and swelling ranks of politically powerful over 55s.

 

[Junior]

If the below ATO figures are correct then that means based on a $1.8T super funds base

* 2% of accounts hold ~ $540B in assets

* 10% of accounts hold ~ $1T in assets

* remaining 90% of accounts hold ~ $720B in assets

Certainly shows how lopsided the super system is.

Based on the income deciles, it's also plain to see where the tax expenditures are going, and it's not really targeted at minimising future pension liabilities.

The interim results of the Murray review were interesting, however I anticipate that the Abbott government will take little/no action following the release of the final report. Most of these recommendations will be detrimental to the short term profitability of the Big 4 and Wealth Management industry which is already taking a beating in the media with the whole FOFA debacle.

The focus on reducing total fees in super I also expect will be ignored... the purpose of MySuper is to reduce cost and this is still in the process of being implemented.

Sydboy, tax concessions for high income earners and large super balances clearly need attention, but I wouldn't hold my breath on this one! Tax reform still a while off.

 

[sydboy007]

The interim results of the Murray review were interesting, however I anticipate that the Abbott government will take little/no action following the release of the final report. Most of these recommendations will be detrimental to the short term profitability of the Big 4 and Wealth Management industry which is already taking a beating in the media with the whole FOFA debacle.

The focus on reducing total fees in super I also expect will be ignored... the purpose of MySuper is to reduce cost and this is still in the process of being implemented.

Sydboy, tax concessions for high income earners and large super balances clearly need attention, but I wouldn't hold my breath on this one! Tax reform still a while off.

ALL tax reform is a long way off. Sadly I think it will be the next recession that gives some impetus to reform, though it'll depend if there's anyone leader with the political cajones to actually get the voters to understand what needs to be done and support it. making sure there is some equity involved would go a long way to getting that public support

 

[Julia]

ALL tax reform is a long way off. Sadly I think it will be the next recession that gives some impetus to reform, though it'll depend if there's anyone leader with the political cajones to actually get the voters to understand what needs to be done and support it. making sure there is some equity involved would go a long way to getting that public support

That is to assume the wider public know or care enough to even think about it in the first place. Do you really think your average Australian spends time pondering tax reform?

 

[sydboy007]

That is to assume the wider public know or care enough to even think about it in the first place. Do you really think your average Australian spends time pondering tax reform?

Prob not, which is why the Politicians have no interest in it either, nor anyinterests in cleaning up the industry or stopping the fee gouge.

It's like sweeping the CBA scandal under the rug by saying it's just a few bad apples (some still employed) and there's no need to do any further investigations. Compare that response with the way ASIC has gone attack dog on Jonathan Moylan for his fake ANZ media release last year claiming they were withdrawing funding for Whitehaven Coal's Maules Creek project on environmental grounds, or the way John Gay CEO of Gunns was given a slap with a piece of limp celery for insider trading.

 

[sydboy007]

With generosity like the below I can see teh ending of teh ageof entitlement any time soon

http://www.smh.com.au/money/super-a...ons-as-asset--rules-shift-20140711-zt3dz.html

The upper annual income threshold applying to the income test for the age pension, at which point there is no entitlement to an age pension, is $47,986 for singles and $73,455 for couples.

Under the deeming rules that will apply to account-based pensions started after January 1, 2015, an individual with a superannuation pension account of more than $1,391,600, and a couple with more than $2,132,900, would not be eligible for any age pension.

If the deeming rates are applied to eligibility for a CSHC, and the only source of income is a pension from a superannuation fund, a single person could have up to $1,449,000 in a superannuation pension account and a couple could have up to $2,319,000 and still be eligible for the CSHC.

What is surprising about the changes announced is that the deeming rates of income will not be applied to other financial assets to assess eligibility for the card.

Considering the primary residence is not included anyone at the upper end of those asset limits is very wealthy. If they're not making at least 5% tax free on their money then they need to get some decent advice or change their advisor. A single person with a million in an account should be making 50K a year, yet they're still going to be entitled to extra cheap PBS medicines. if they own their own home then their cost of living is quite low. They'll be in the same pre tax income decile as someone earning roughly $62K, well above the median wage of roughly $47K.

If a person got to this stage with no Govt support, I could understand, but considering the large amounts of low taxed super, and the fact it's now tax free income for them, surely much lower levels of assets have to be considered to make the whole pension system sustainable?

 

[Junior]

This article in The Age reflects my view on our super system, in that it's not as expensive as it's made out to be.

Older, more expensive products are still being phased out and replaced by lower cost options. MySuper is still being implemented.

We have vast choice & flexibility in respect of investment and insurance options.

The head of the Financial Services Council, John Brogden, has accused the Grattan Institute think tank, and Financial System Inquiry chairman David Murray, of sloppy use of data to back their arguments that superannuation fees are too high.

Mr Brogden said critics had not taken into account Australia’s more active management, choice and life insurance options when comparing costs to international pension schemes.

Mr Brogden, who will stand down from the group in January to head the Australian Institute of Company Directors, said it was “remarkable” the Grattan Institute had concluded that MySuper had already failed. He pointed to research commissioned by his group from Rice Warner, which found that MySuper had reduced fees in default superannuation from 0.92 per cent to 0.73 per cent between 2011 and 2013.

This fee level compared with CalPERS in the US at 0.77 per cent, the Canada Pension Plan at 0.92 per cent, the Government Pension Fund of Norway at 0.74 per cent and the MPF system in Hong Kong at 1.30 per cent.

Rice Warner chief executive Michael Rice told the conference that across all superannuation products, fees had fallen between 2002 and 2013 from 1.37 per cent to 1.12 per cent and with MySuper, this would head below 1 per cent.

Read more: http://www.smh.com.au/business/bank...es-council-20140808-101qru.html#ixzz39ll4ddhn

 

[sydboy007]

This article in The Age reflects my view on our super system, in that it's not as expensive as it's made out to be.

Older, more expensive products are still being phased out and replaced by lower cost options. MySuper is still being implemented.

We have vast choice & flexibility in respect of investment and insurance options.

I'd prefer to see a change in the way we're billed for super to a more flat rate regime. There doesn't seem to be any logic being a % of FUM model, unless there was a tiered rate structure that heps to lower the level of fees paid as balances grow.

Better would be to have a fixed account fee with a low fee based on the account balance.

I doubt even the silver doughnut could actually prove that as FUM increases average costs don't decrease.

The amount of work required to manage 500K is not 5 times as much to manage 100K

 

[sptrawler]

Of course. Why would someone near or over 60 years want to see change in tax free super when it's possible to have an 80K super pension tax free and in the last FY earn another 20.5K outside super tax free as well when using the LITO.

Golly gosh, a $100K income and not a cent to pay in tax. Shame on those PAYG tax slaves wondering how they'e supposed to fund everything with a declining participation rate and swelling ranks of politically powerful over 55s.

There you go again Syd, bending things again.

If someone near 60 is getting an $80k pension, that equates to 4% of $2m, how does someone get $2m into super other than after tax dollars.

The salary sacrifice component will be taxable, and the 20.5k he/she earns will be added to that taxable component, then taxed minus the 15% offset.
The component of the $80k, that was put into the super after tax, is tax free. Or would you have them taxed on that as well? A bit like taxing you on money you withdraw from the bank.lol

Looking at your example, lets say the $2m is made up of $1m salary sacrifice and $1m after tax contribution.
Therefore 50% of the $80k is taxable, i.e $40k, add to this the $20.5k earned at Bunnings and the taxable income is $60.5k less a 15% tax offset.

In reality the salary sacrificed component would probably be much less, due to the contribution caps, therefore the taxable component would be even less.

If the person is over 60, then your example is accurate, however even if you taxed peoples pension, it would only be on the taxable component. I don't think that part of the equation is as big a deal as you are making out.
The bigger issue is tax free earnings in the fund.

Ves, Craft and Junior can correct me if I'm wrong

 

[sydboy007]

There you go again Syd, bending things again.

If someone near 60 is getting an $80k pension, that equates to 4% of $2m, how does someone get $2m into super other than after tax dollars.

The salary sacrifice component will be taxable, and the 20.5k he/she earns will be added to that taxable component, then taxed minus the 15% offset.
The component of the $80k, that was put into the super after tax, is tax free. Or would you have them taxed on that as well? A bit like taxing you on money you withdraw from the bank.lol

Looking at your example, lets say the $2m is made up of $1m salary sacrifice and $1m after tax contribution.
Therefore 50% of the $80k is taxable, i.e $40k, add to this the $20.5k earned at Bunnings and the taxable income is $60.5k less a 15% tax offset.

In reality the salary sacrificed component would probably be much less, due to the contribution caps, therefore the taxable component would be even less.

If the person is over 60, then your example is accurate, however even if you taxed peoples pension, it would only be on the taxable component. I don't think that part of the equation is as big a deal as you are making out.
The bigger issue is tax free earnings in the fund.

Ves, Craft and Junior can correct me if I'm wrong

The point I was making is if you are near 60 or over 60 then why would you want any changes to the current very generous tax system around super.

I have an issue where a small subset of super pension recipients are able to receive tax breaks more than the pension - tell me how that makes budgetary sense. It seems all tax expenditures are off limits in the current environment. The below graph sums up pretty well how little super willa ctually help with reducing the cost of the aged pension because little of it actually goes tot hose that will receive it.

Earnings in the funds is where the tax benefits are going to grow the fastest. I've got to a super balance last year where the earnings was within a few hundred dollars of my employer contributions, so I'm now at the point where the tax breaks on the fund earnings will usually be higher than on contributions.

 

[FxTrader]

The point I was making is if you are near 60 or over 60 then why would you want any changes to the current very generous tax system around super.

Certainly none that would affect those in that age bracket who have engaged in retirement planning around the existing super taxation laws. Benefits will need to be wound back depending on one's age bracket, the younger you are the less generous future benefits will likely be. In my view, the biggest inequity in the whole system is the primary residence exemption from the age pension assets test. Property millionaires should not have access to the age pension period, future generations will likely be less inclined or able to support such largess.

The below graph sums up pretty well how little super willa ctually help with reducing the cost of the aged pension because little of it actually goes tot hose that will receive it.

True, but penalizing those about to retire or already retired by changing the current system will not solve the long term funding issue either.

Earnings in the funds is where the tax benefits are going to grow the fastest. I've got to a super balance last year where the earnings was within a few hundred dollars of my employer contributions, so I'm now at the point where the tax breaks on the fund earnings will usually be higher than on contributions.

Already there and I still have a way to go yet before I will have sufficient funds to be a self-funded retiree.

 

[sptrawler]

The point I was making is if you are near 60 or over 60 then why would you want any changes to the current very generous tax system around super.

I have an issue where a small subset of super pension recipients are able to receive tax breaks more than the pension - tell me how that makes budgetary sense. It seems all tax expenditures are off limits in the current environment. The below graph sums up pretty well how little super willa ctually help with reducing the cost of the aged pension because little of it actually goes tot hose that will receive it.

Earnings in the funds is where the tax benefits are going to grow the fastest. I've got to a super balance last year where the earnings was within a few hundred dollars of my employer contributions, so I'm now at the point where the tax breaks on the fund earnings will usually be higher than on contributions.

The point I was making, was you don't give accurate information to support your arguements.

With regards the tax breaks greater than the pension.
If you are going to tax individuals when their self funding pension is greater than the government funded free pension. Why would anyone put their own money in?

This would then lead to the only money going into super, being the employers contribution. Which in turn would leave everyone with inadequate funds in super.

I don't dissagree the tax breaks on super need reviewing, just think it has to be in a realistic manner.

Everything you mention, would in my opinion, cause the super system to fail. Ridiculously low caps, tax on earnings and on pensions.
As I said above, how can you tax people on their own money when they are withdrawing it?
If the individuals pension is composed mainly of after tax contributions, how can you tax their pension just because it is more than the age pension. That's crazy.

 

[sptrawler]

Certainly none that would affect those in that age bracket who have engaged in retirement planning around the existing super taxation laws. Benefits will need to be wound back depending on one's age bracket, the younger you are the less generous future benefits will likely be. In my view, the biggest inequity in the whole system is the primary residence exemption from the age pension assets test. Property millionaires should not have access to the age pension period, future generations will likely be less inclined or able to support such largess.


True, but penalizing those about to retire or already retired by changing the current system will not solve the long term funding issue either.

.

+1 agree with your assesment. The system is only 20years old, I'm sure it will be modified and adjusted.

 

[sydboy007]

The point I was making, was you don't give accurate information to support your arguements.

With regards the tax breaks greater than the pension.
If you are going to tax individuals when their self funding pension is greater than the government funded free pension. Why would anyone put their own money in?

This would then lead to the only money going into super, being the employers contribution. Which in turn would leave everyone with inadequate funds in super.

I don't dissagree the tax breaks on super need reviewing, just think it has to be in a realistic manner.

Everything you mention, would in my opinion, cause the super system to fail. Ridiculously low caps, tax on earnings and on pensions.
As I said above, how can you tax people on their own money when they are withdrawing it?
If the individuals pension is composed mainly of after tax contributions, how can you tax their pension just because it is more than the age pension. That's crazy.

From what I've read, when comparing the Australian super system to overseas variants, we have probably the most tax light system out there.

We have minimal tax on the way in and tax free on the way out. No other country does this.

Most countries provide minimal to no tax on the way in or the way out. In the US there's no tax on benefits going in, but they pay normal income tax rates on pensions paid from the 401K plans.

The current system is not affordable. Is it fair that gen X and those behind them have to pay higher taxes to fund tax free super?

As wayne said, how is it reasonable for property millionaires to be able to claim a full pension, especially if they've used their 100-200K super balance to pay off the mortgage? The longer the unfair level of support to the super system continues, the more we will see budgets like this year were students, families, the unemployed face the brunt of spending cuts.

 

[sptrawler]

From what I've read, when comparing the Australian super system to overseas variants, we have probably the most tax light system out there.

We have minimal tax on the way in and tax free on the way out. No other country does this.

Most countries provide minimal to no tax on the way in or the way out. In the US there's no tax on benefits going in, but they pay normal income tax rates on pensions paid from the 401K plans.

The current system is not affordable. Is it fair that gen X and those behind them have to pay higher taxes to fund tax free super?

As wayne said, how is it reasonable for property millionaires to be able to claim a full pension, especially if they've used their 100-200K super balance to pay off the mortgage? The longer the unfair level of support to the super system continues, the more we will see budgets like this year were students, families, the unemployed face the brunt of spending cuts.

I don't disagree, but what is the difference between taxing lightly on peoples savings( super), or giving away tax money to family benefits or students doing degrees or the unemployed?

Why is it o.k, to tax those that forego lifestyle to be self funded.
Yet not o.k, to demand those who are recipients of handouts, prove they are genuine.

Another interesting thing in your post, you usually are bagging the U.S for their deplorable social systems. This post you throw them up as an example to show a better way.lol

I do believe the family house should be included in the asset test.