Superannuation, the ultimate government cash cow?

[sptrawler]

Definitely. When you're account / advisor says taking a lump sum of $XXXXX and spenidng it on a holiday or renovations will get you $XXX in extra pension every fortnight I'm sure plenty of interest will be expressed.

Maybe we could expand the concept even further.
If it is a rort to spend your super and get more pension.
Maybe we could extend that to welfare recipients that own assets, if a person has assets they can reverse mortage them untill they get a job, rather than the dole.
Why should taxpayers have to fund someones unemployment benefit, when they own a $1million house?

 

[qldfrog]

Maybe we could expand the concept even further.
If it is a rort to spend your super and get more pension.
Maybe we could extend that to welfare recipients that own assets, if a person has assets they can reverse mortage them untill they get a job, rather than the dole.
Why should taxpayers have to fund someones unemployment benefit, when they own a $1million house?

my understanding is that you do not get any unemployment benefit if you owe more than 30k...
Which explain the low unemployment figure in australia, i do not know any unemployed person getting benefit, but i know a lot of person "not currently working"
Australia is such a place of leisure...

 

[sydboy007]

Maybe we could expand the concept even further.
If it is a rort to spend your super and get more pension.

Is it sustainable to forgo income tax on super contributions, allow lump sums of any amount, allow lump sums to be spent / capitalised into the primary residence, then increase pension payments because of this.

Factor in that current Federal spending on aged services, including the pension, is already $55B out of a $360-370B budget, 7000 people a week are hitting retirement age (trend will accellerate for the next decade or so).

The participation rate has already fallen considerably since the GFC, it has a lot further to fall.

So is it sustainable to continue to allow very easy / increased access to the pension by simply spending your super?

Is it wrong to think that current income taxes are higher because of this?

Will it get increasingly difficult to stop the taking of lump sums as more and more people are eligible to do it?

 

[Junior]

Definitely. When you're account / advisor says taking a lump sum of $XXXXX and spenidng it on a holiday or renovations will get you $XXX in extra pension every fortnight I'm sure plenty of interest will be expressed.

I've been written 100s of SOAs for around 30 different financial planners over the past 10 years. Not once have I seen this suggestion. No one wants to rely on full age pension in retirement. Far better to live on a mix of part age pension and account based pension from super. This results in a better standard of living with a lump sum sitting in super in case of emergency.

 

[sptrawler]

I've been written 100s of SOAs for around 30 different financial planners over the past 10 years. Not once have I seen this suggestion. No one wants to rely on full age pension in retirement. Far better to live on a mix of part age pension and account based pension from super. This results in a better standard of living with a lump sum sitting in super in case of emergency.

Syd would have us believe it is the driving ambition of the majority of baby boomers, to avail themselves of the age pension.
If that were the case, it would show a complete lack of ambition and foresight, of a generation.
Then in another thread, Syd would have us believe it is the baby boomers, that have reaped the rewards of a debt driven 20 year wealth creation boom.
Why someone would "blow" the nest egg they have taken a lifetime to accumulate, to put themselves at the mercy of a Government handout, he is yet to explain.

 

[sydboy007]

I've been written 100s of SOAs for around 30 different financial planners over the past 10 years. Not once have I seen this suggestion. No one wants to rely on full age pension in retirement. Far better to live on a mix of part age pension and account based pension from super. This results in a better standard of living with a lump sum sitting in super in case of emergency.

So just to clarify, you're saying none of the clients the SOAs were designed for has taken a lump sum from their super?

The super system, because of the income and assets test, is biased towards home owners. There is an inbuilt bias to keep the highest value primary residence since it's "invisible". That hits the states taxation system where SD makes it costly for someone to trade down to a smaller residence, along with they now have an asset outside the family home that could reduce the level of aged pension.

Have you ever written an SOA that advised someone to trade down their property, because the increase in income yielding assets is higher than the reduction int eh aged pension?

Syd would have us believe it is the driving ambition of the majority of baby boomers, to avail themselves of the age pension.
If that were the case, it would show a complete lack of ambition and foresight, of a generation.
Then in another thread, Syd would have us believe it is the baby boomers, that have reaped the rewards of a debt driven 20 year wealth creation boom.
Why someone would "blow" the nest egg they have taken a lifetime to accumulate, to put themselves at the mercy of a Government handout, he is yet to explain.

One does not have to blow it. One just has to renovate the primary residence or upgrade.

If no one is doing it, then what's the problem with restricting how much / what % of a super balance can be used as a lump sum?

Regularly I see people asking Noel Whittacker for advise on how to maximise their pension entitlements. A simple google search for how to maximise aged pension access brings up plenty of financial companies offering advise on how to structure your finances to achieve the goal. How common it is? Probably very hard to determine because the records are not particularly easy to access, but if companies are advertising they can hep you acheive it then they must believe there's a market for that kind of advise.

We're the only country that has no legal requirement to actually use a pensions savings account to provide an income in retirement.

 

[sptrawler]

So just to clarify, you're saying none of the clients the SOAs were designed for has taken a lump sum from their super?

The super system, because of the income and assets test, is biased towards home owners. There is an inbuilt bias to keep the highest value primary residence since it's "invisible". That hits the states taxation system where SD makes it costly for someone to trade down to a smaller residence, along with they now have an asset outside the family home that could reduce the level of aged pension.

Have you ever written an SOA that advised someone to trade down their property, because the increase in income yielding assets is higher than the reduction int eh aged pension?.

Don't mean to jump in on Juniors question, however there is a surge in baby boomers downsizing, which is leading to a shortfall in smaller housing stock being available. Well that is what our local real estate agents are reporting.

One does not have to blow it. One just has to renovate the primary residence or upgrade.

If no one is doing it, then what's the problem with restricting how much / what % of a super balance can be used as a lump sum?

Regularly I see people asking Noel Whittacker for advise on how to maximise their pension entitlements. A simple google search for how to maximise aged pension access brings up plenty of financial companies offering advise on how to structure your finances to achieve the goal. How common it is? Probably very hard to determine because the records are not particularly easy to access, but if companies are advertising they can hep you acheive it then they must believe there's a market for that kind of advise.

We're the only country that has no legal requirement to actually use a pensions savings account to provide an income in retirement.

As has been said on numerous occassions, those with small balances are withdrawing it, for all sorts of reasons.

I doubt anybody is spending money to gain 50cents of extra pension, for every $1 they get rid of.
If it is happening, it will be by people who are in their predicament, by following that very sort of reasoning.
However if someone hits retirement and still owes $100k on their house and have $80k in super, it would be silly of them not to pay the $80k off the house.IMO
Having said that, they would get the full pension wether they spend the $80k or not and I'm sure many would keep the $80k as a buffer.

Now let's take someone who has say 10,000 CBA shares in their SMSF, they are getting around $50k dividend and a tiny bit of pension.
You're telling me they are going to sell a chunk of the shares to get extra pension? I think you are dreaming.
Even if they only had 2000 shares in CBA, they wouldn't be selling them to get more pension, unless they are stupid.IMO


Our system was developed on the same system as the U.K and Canada.
Everyone in those countries, who has paid taxes into the pension system recieves a pension irrespective of their savings, or wealth.

There are several companies offering ways to access your super early, does that mean a large number are doing it?
Probably not.
But as you say, there must be a market for it, one can only go off ones own experience and personal knowledge.

 

[Bill M]

I think that the pension assets test cuts the government pension out at around $1.1 Million for a couple.

If I was in a position of having $1.2 Million then I would seriously consider up dating my car, kitchen and bathroom and spending 150K in order to get a part pension.

The difference between having $1.05 M and $1.2 M private pension is not massive and then the part government pension and all the benefits that come with it will make up some of that income (if not all) you forgo. It is a good strategy IMHO and I would probably do that if I was coming up to Pension age. I don't make the rules but I certainly will abide by them and use them to my advantage.

 

[sptrawler]

I think that the pension assets test cuts the government pension out at around $1.1 Million for a couple.

If I was in a position of having $1.2 Million then I would seriously consider up dating my car, kitchen and bathroom and spending 150K in order to get a part pension.

The difference between having $1.05 M and $1.2 M private pension is not massive and then the part government pension and all the benefits that come with it will make up some of that income (if not all) you forgo. It is a good strategy IMHO and I would probably do that if I was coming up to Pension age. I don't make the rules but I certainly will abide by them and use them to my advantage.

I agree with that.

But someone with say $2m isn't going to spend $1m to get $1 of pension and the perks. The goal posts could be moved two days later and they lose it.

Same as someone with $500k isn't going to go out of his/her way to spend $100k to get an extra $4000/year pension. Just guessing numbers as an example.

Bill if they cut the assetts test to $500k would you get rid of $700k to get part pension?

 

[Bill M]

I agree with that.

Bill if they cut the assetts test to $500k would you get rid of $700k to get part pension?

No never, I would only do it if it was a very low and insignificant amount to me.

 

[sptrawler]

No never, I would only do it if it was a very low and insignificant amount to me.

My point exactly.

If the pension cut off point becomes say $500 or $600k, no one will put anything extra into super.
Why would Mr and Mrs Joe average put away their own money, to get $700 or $800k into super, which will give him an income of say $35,000/p.a
When he could just forget about super, pay off the house, have overseas holidays, buy a run out Falcon GT, 200 series Landcruiser and caravan and generally not worry too much. Then pick up a $32,000 Government pension.

So where does that leave us? right where we are, the average amount in super is for males $150k and females about $80k. So everyone on a full pension.

The current system Joe average probably gets $5k - 10k part pension, on top of his self funded $35k, a net saving of probably $20 - $25k to the government.
But that $10k Government top up, makes it attractive for Joe to try and get the $700k in super and keep it there.

 

[sydboy007]

My point exactly.

If the pension cut off point becomes say $500 or $600k, no one will put anything extra into super.
Why would Mr and Mrs Joe average put away their own money, to get $700 or $800k into super, which will give him an income of say $35,000/p.a
When he could just forget about super, pay off the house, have overseas holidays, buy a run out Falcon GT, 200 series Landcruiser and caravan and generally not worry too much. Then pick up a $32,000 Government pension.

So where does that leave us? right where we are, the average amount in super is for males $150k and females about $80k. So everyone on a full pension.

The current system Joe average probably gets $5k - 10k part pension, on top of his self funded $35k, a net saving of probably $20 - $25k to the government.
But that $10k Government top up, makes it attractive for Joe to try and get the $700k in super and keep it there.

So what's the point of the current system, if as you say the majority have small balances? What's the point of a complex system that costs $18B a year to run (most of these smaller balances wouldn't be in a SMSF). Are we better off to have provided lower taxes on the super balance only to see it pay off debts on retirement? Seems like tax churn to me.

It seems easier to access cheaper investment options outside most super funds, and possibly people would be more inclined to get lower fees since they'll be more likely to take an interest in the money they're investing.

One of the reasons given by the Govt for stopping the increase in the super guarantee contribution rate was because it would save the budget money. Is that just a short term saving, or possibly it's a perpetual saving? I'd be inclined to think the later.

 

[sptrawler]

So what's the point of the current system, if as you say the majority have small balances? What's the point of a complex system that costs $18B a year to run (most of these smaller balances wouldn't be in a SMSF). Are we better off to have provided lower taxes on the super balance only to see it pay off debts on retirement? Seems like tax churn to me..

Low balances are only the norm at the moment, but the system is currently designed, so people such as yourself can put away extra.
I'm sure caps will be introduced to stop excessive balances being accumulated and withdrawl taxes will be introduced.
The super system has to encourage those who can afford it, to lock away money to be self funded, a bit like private health/ medicare.

It seems easier to access cheaper investment options outside most super funds, and possibly people would be more inclined to get lower fees since they'll be more likely to take an interest in the money they're investing..

That is why there has to be a tax break on super, otherwise people would do exactly that.
You keep saying the tax breaks will cost $x in 2030... .
There is no way the tax breaks will be there when the balances reach a point of being positive in growth.

The system demands greater amounts be drawn as the account holder ages, this is to ensure the balance doesn't increase. The last thing the Government wants is intergenerational wealth transfer on that magnitude.

One of the reasons given by the Govt for stopping the increase in the super guarantee contribution rate was because it would save the budget money. Is that just a short term saving, or possibly it's a perpetual saving? I'd be inclined to think the later.

The problem really is, the low income earners are in all likelyhood never going to have enough in super to reduce their pension payment.
The only ones who are likely to become self funded and not require any pension are middle and high income earners.
However could you imagine the uproar if a Government said, the super guarantee only applies to income over $x.

 

[sydboy007]

http://www.afr.com/p/opinion/repair_weak_super_foundations_tW9VzV2wnI2lshxC0uChVK

Coalition MP, and former advisor to Peter Costello, Kelly O’Dwyer:

If you knew there were weaknesses in the foundations for a building, would you make sure the foundations could be fixed and repair them before increasing its size by more than 25 per cent?..

Under Labor’s timetable for an increase in compulsory superannuation, the Commission of Audit concluded that there was unlikely to be an increase in the proportion of Australians who were fully self-sufficient… [T]he proportion of people eligible for an age pension would remain constant at about 80 per cent for the next forty years. That’s the same proportion of the population that received the pension in the late 1970s…

The Commission of Audit and Henry Tax Review each canvassed reforms to the eligibility tests for the pension…

Australia’s superannuation system is [also] unusual by world standards in allowing Australians to withdraw their entire superannuation as a lump sum…

Research cited in the Inquiry’s Interim Report highlights that approximately 44 per cent of retirees who take a lump sum use it to pay off housing and other debts, to purchase a home or to make other home improvements. A further 28 per cent use the lump sum to purchase a holiday or new vehicle…

The system effectively encourages Australians to over-capitalise on their homes, spend all or some of the balance on other forms of consumption, and then turn to the age pension…

Naturally, the situation is exacerbated by yet another quirk in the system, where the access age to superannuation (60, if you are retired and were born after July 1, 1964) differs from the eligibility age for the age pension (currently 65, rising to 70)…

Then there are other issues: like the level of competition in superannuation and whether it is resulting in fees which truly represent the value delivered, rather than blatant rent seeking…

She's pretty much on the money.

For those who argue that super has helped improve our level of savings, the blow chart seems to indicate we've just stopped saving outside super. There's been a pretty significant downward trend in the real household saving rate since super was introduced.

Notice how's there's a reasonable inverse relationship between private and Govt debt ratios in the second chart. Without running a trade surplus I don't see how both the private and public sectors can de-leverage at the same time

 

[sptrawler]

http://www.afr.com/p/opinion/repair_weak_super_foundations_tW9VzV2wnI2lshxC0uChVK

Research cited in the Inquiry’s Interim Report highlights that approximately 44 per cent of retirees who take a lump sum use it to pay off housing and other debts, to purchase a home or to make other home improvements. A further 28 per cent use the lump sum to purchase a holiday or new vehicle…

So 44% pay of house or debts and 28% only have enough super to buy a car or have a holiday.

That means effectively 72% have realatively small super balances, that can't support a reasonable self funded pension .

[

The system effectively encourages Australians to over-capitalise on their homes, spend all or some of the balance on other forms of consumption, and then turn to the age pension…

That is an opinion not based on anything. Why would someone want to get rid of their own money to obtain a lower standard of living.
It doesn't make sense, for those that have a reasonable amount and as I have posted earlier only 3% of SMSF pull lump sums.
Therefore as SMSF are a large represtative group of retirees, it would indicate the author hasn't done a lot of research, to support his theory.
Statistics show those with low balances spend the balance, I haven't seen any statistics that show people are overcapitalising in their houses to obtain a pension.
On the contrary, many people are downsizing, when reaching retirement.

 

[Judd]

.............That is an opinion not based on anything. Why would someone want to get rid of their own money to obtain a lower standard of living............

They did at one stage. When I was in the former Department of Social Security, it was astonishing to me individuals/couples who would dispose of assets which could have generated income in the five figures area, just to get the pension and benefits (which were then worth about $2,500) because "I've paid taxes all my life and I'm entitled to it."

I don't think it really applies now due to the gifting rules but I've been out of that area for many years. However, it would not surprise me if there is lingering resentment by some at being denied their "rights" due to the income and assets tests.

 

[sptrawler]

They did at one stage. When I was in the former Department of Social Security, it was astonishing to me individuals/couples who would dispose of assets which could have generated income in the five figures area, just to get the pension and benefits (which were then worth about $2,500) because "I've paid taxes all my life and I'm entitled to it."

I don't think it really applies now due to the gifting rules but I've been out of that area for many years. However, it would not surprise me if there is lingering resentment by some at being denied their "rights" due to the income and assets tests.

That's true Judd, my father was hell bent on getting the pension, I think people are now more financially informed.

When my parents were in their 30's the last thing they were interested in was owning a house, now it is the foremost thing in young peoples minds.
Society is always evolving, wether that be for the better or worse who knows.

 

[Bill M]

Seems like we are doing something right.

---
AUSTRALIA'S SUPER SYSTEM 2ND BEST: REPORT

Australia has the second best retirement savings system in the world, according to a survey of global pensions.

The Melbourne Mercer Global Pension Index found Australia's ability to fund the lifestyles of retirees trailed only Denmark.

Full Story Here:http://www.thebull.com.au/articles/a/49384-australia's-super-system-2nd-best:-report.html
---

 

[sptrawler]

Seems like we are doing something right.

---
AUSTRALIA'S SUPER SYSTEM 2ND BEST: REPORT

Australia has the second best retirement savings system in the world, according to a survey of global pensions.

The Melbourne Mercer Global Pension Index found Australia's ability to fund the lifestyles of retirees trailed only Denmark.

Full Story Here:http://www.thebull.com.au/articles/a/49384-australia's-super-system-2nd-best:-report.html
---

I don't know how long that rating will last, with interest rates at present settings and drawdown rates back to normal, the balances will be reducing substantionally.

 

[sptrawler]

Well here is an ATO list of SMSF balances, by value, just so people can be accurate when making statements.


Asset ranges 2013
$0–$50,000 = 6.7%

>$50,000–$100,000 = 5.1%

>$100,000–$150,000 = 5.4%

>$150,000–$200,000 = 5.1%

>$200,000–$500,000 = 24.7%

>$500,000–$1m = 23.4%

>$1m–$2m = 17.6%

>$2m–$5m = 9.9%

>$5m–$10m = 1.8%

>$10m = 0.4%

Total
100%