Superannuation, the ultimate government cash cow?

[banco]

Yesterday I bumped into a 74 year old man whilst I was on one of my walks. We got on to talking about pensions and savings.

He went on to say that when he was 6 Months away from turning 65 he went to see Centerlink about getting his government funded pension. The only problem was that Centerlink told him he had too much money and was not entitled to one. He said that it was his right and that he worked all of life and felt that he wasn't going to get duded by the Government.

He ended up disposing his assets in ways that when he did turn 65 he was entitled to a full pension. He said, "now I have everything, my pension, health card and all the perks". He said, I just don’t think it is fair that someone can spend their whole life drinking, smoking and gambling their money away whilst another person who saves his money, buys a house and then gets penalised for it. I kind of saw the old mans point of view and why he was thinking like he was.

The reason why I mention this is because there are many Aussies out there that will go to all lengths in order to get a Government funded pension. It just doesn't matter what the rules are, there will always be a way of getting around them legally. I think over taxing, penalising and complicating the Super system is the wrong way to go. People need to have reasons to save, otherwise they will put the whole deal in the too hard basket and say things like, why should I save, anymore than $XXX in the bank or super and they will take my pension away.

The Super system encourages me away from the pension system, isn't that a good thing?

Next time you run into him he'll probably complain about the deficit.

 

[FxTrader]

The average joe, with the socialist welfare mentality that we have allowed to breed in this country cannot leave free money on the table. He will take his super as a lump sum and dispose of it any way he can. Gotta get that pension, or, gotta get that part pension. Buy a caravan and spend a few years travelling Australia blowing your super and you'll be on that free-welfare time befre you know it, with all the perks. Gotta blow the money, gotta blow it, gotta blow it to get the free money. This is Australia.

The scenario you describe here would only apply to those with relatively small super balances and even then represents poor planning and decision making. If one is determined to collect a full or part pension from the government then restructuring asset allocation to store wealth in your PPOR and minimize assessable assets to meet assets test limits must be your priority. Millionaire property owners collecting the pension are now quite common and politicians don't have the will or courage to propose a change to this situation.

 

[Bill M]

Millionaire property owners collecting the pension are now quite common and politicians don't have the will or courage to propose a change to this situation.

I have a friend right now who is relocating to his principle place of residence in Sydney worth $1.5 Million and his reason why was "I hope to pick up a bit more of the government pension". He was renting it out previously but if he moves in the rents gone and the Governments picks up his pension tab.

 

[Julia]

The following is summary from Trish Power of "Superguide" on today's release of recommendations by David Murray. As she points out, they are recommendations only so hopefully not too much hysteria will be generated by an assumption that they will necessarily all be implemented.

Note: The items below are only recommendations and the federal government is consulting with industry and consumers until 31 March 2015 before making any final decisions on the recommendations. I encourage all readers to make submissions about any recommendation that you are concerned about. (You can access the full FSI Final Report at the end of this article). I will expand on some of these recommendations in the December 2014 newsletter.

Ban use of limited recourse borrowing arrangements by super funds (that is, by SMSFs). The FSI committee describes LRBAs as ‘direct borrowing’ which is not strictly correct, since there is an interposed trust used between the SMSF and the lender, but the key message remains the same. The FSI committee recommend that LRBAs no longer be used by super funds, restricting the ability of SMSFs to use gearing to purchase fund assets. Current arrangements would be allowed to continue. I will expand on this recommendation in the December 2014 newsletter.
Enshrine in legislation core objectives of superannuation system. Any policy proposals would then need to be consistent with these objectives. The FSI Final Report suggests objectives (Table 3 on page 95) which SuperGuide will publish in the December 2014 newsletter, and the report also recommends establishing a publicly funded independent body to assess the superannuation system’s performance and report on policy changes.
Change the default super fund arrangements. Introduce a new competitive process to allocate new default fund members to MySuper products (to drive down fees).
Require super trustees to pre-select a retirement income product for fund members. For the industry, impediments to product development should be removed. For consumers, a fund member can choose to use the product, or the fund member can take super benefits in another way. And if you’re flicking through Chapter 2 and you see CIPR, it means ‘comprehensive income product for retirement’.
Introduce absolute choice of fund. Ensure all employees have the ability to choose the super fund where SG contributions are paid. Currently, about 20% Australians cannot choose which super fund SG contributions are paid into.
Require trustee boards of public offer funds to have a majority of independent trustees. The chair of the trustee board should also be independent.
Allow impact investing by super funds. The FSI committee recommends that super funds be permitted to make investments that provide both social and financial returns, as a means to support social service delivery
Publish retirement income projections on member statements.
Facilitate access to consolidated super information from the ATO to use with ASIC’s retirement income projection calculators.
Taxation of superannuation. Now this section of the report makes amusing albeit alarming reading. I have devoted a separate section for the FSI committee comments on tax and super, noting also that the FSI was not charged with this term of reference. In short, the FSI committee supports higher taxes at contribution and earning stages. See later in this article.
Develop digital identities for consumers and businesses. Digital identity facilitates online transactions, and developing a national framework arguably reduces the incidence of fraud.
Make product issuers (financial organisations) and distributors (financial advisers) more accountable for design and distribution of products. ASIC should also be able to intervene if a product could be a financial detriment to consumers.
Create a culture in financial planning firms that focuses on the interests of consumers. The FSI committee considers this recommendation needs to address conflicted remuneration in life insurance and stockbroking, and enhanced ASIC powers to ban individuals from running financial advising firms.
Relax disclosure laws to allow product disclosure and communication with consumers to be conducted using online tools, new media, self-assessment tools and videos. The industry should also develop standards for disclosing risks and fees.
Require financial advisers to have a tertiary degree, competence in specialised areas (such as superannuation). Minimum standards should also include ongoing professional development. You may be surprised that these standards are not already in place.
Introduce an enhanced register of advisers. The register should include advisers who are employees, and include licence status, work history, education, qualifications and credentials, areas of advice, employer, business structure and years of experience.
Rename general advice.
Create a new Financial Regulator Assessment Board. This board would advise government annually on how financial regulators have implemented their responsibilities. Interestingly, the ATO is not considered a financial regulator, only ASIC, APRA and the RBA.
Strengthen ASIC, and provide more stable funding. The FSI committee suggests ASIC and APRA should be subject to a three-year funding model and reviewed regularly. ASIC’s regulatory activities should be funded by industry, and receive more regulatory powers to deal with misconduct.
Keep regulation of SMSFs with ATO, rather than move to APRA. The Financial Services Council (representing financial organisations) and the Actuaries Institute submitted that SMSFs should be regulated by APRA.
Differentiate products offered by finance companies compared with banks.
Define bank accounts and life insurance accounts as inactive only after 7 years, rather than the current 3 years.

Tax alert! Super and investment taxes targeted by FSI

The federal government is referring nonsensical arguments from the FSI committee relating to super and investment taxes, to the Tax White Paper process. The issues highlighted in the FSI Final Report about taxes on investment, super and retirement, are outlined below.
Tax concessions on superannuation

For your amusement, I have quoted directly from the report because what has been written in Appendix 2 reads like an excerpt from Joseph Heller’s book, Catch-22.

On page 280 of the report, the FSI committee states: “Tax concessions in the superannuation system are not well targeted to achieve provision of retirement incomes. This increases the cost of the superannuation system to taxpayers and increases inefficiencies arising from higher taxation elsewhere in the economy, and the distortions arising from the differences in the tax treatment of savings. It also contributes to the broader problem of policy instability, which imposes unnecessary costs on superannuation funds and their members and undermines long-term confidence in the system…”

What the heck is that about? If this paragraph makes it into the Tax White Paper discussion paper, then someone in the secretariat or government should be advised to seek a different career. The key message you can take from this gobbledygook is that the FSI committee is pushing for more taxes on super.

The next suggestion relating to super fund earnings is not much better.
Tax treatment of super fund earnings

The FSI committee considers that super fund earnings in pension phase (currently tax-exempt) should be taxed at the same rate as the accumulation phase (which is currently 15%).

Quoting directly from page 280 of the report: “Earnings are taxed at 15 per cent in the accumulation phase, but are untaxed in the retirement phase. This can act as a barrier to funds offering ‘whole-of-life’ superannuation products and increases costs in the superannuation system. Aligning the earnings tax rate between accumulation and retirement would reduce costs for funds, help to foster innovation in whole-of-life superannuation products, facilitate a seamless transition to retirement and reduce opportunities for tax arbitrage….”.

Again, this paragraph lacks clarity and analytical rigour, and is simply a circular statement. I find this lack of understanding of superannuation very disturbing, especially in such a significant report. The statement quoted above is nonsense, and I will explain why in the December 2014 newsletter.
Removal of franked dividends (dividend imputation)

The reason the FSI committee wants franking credits to go is that the big players can’t access the franking credits. I will explore this suggestion in more detail in the December 2014 newsletter.
Other investment taxes

The FSI committee have also targeted the following investment taxes for review:

Tax on interest income, from bank deposits and fixed-income securities. The FSI asks whether these products should be more favourably taxed.
Capital gains tax concessions for assets held longer than 12 months.
Negative gearing on property (but it seems the FSI committee is not worried about margin lending on shares, and which caused more damage during the GFC than negative gearing on property).

For more information on these recommendations, and the broader recommendations, see the FSI Final Report. Click here to access the report.
© Copyright Trish Power 2009-2014

 

[sptrawler]

The following is summary from Trish Power of "Superguide" on today's release of recommendations by David Murray. As she points out, they are recommendations only so hopefully not too much hysteria will be generated by an assumption that they will necessarily all be implemented.

Very interesting reading, Murray has taken a very broad view with his recommendations, one would think the white paper will have a more thorough and in depth approach.

 

[sydboy007]

I have a friend right now who is relocating to his principle place of residence in Sydney worth $1.5 Million and his reason why was "I hope to pick up a bit more of the government pension". He was renting it out previously but if he moves in the rents gone and the Governments picks up his pension tab.

The following is summary from Trish Power of "Superguide" on today's release of recommendations by David Murray. As she points out, they are recommendations only so hopefully not too much hysteria will be generated by an assumption that they will necessarily all be implemented.

The politico housing industry has already fired off a few broad shots to try and minimise and changes.

From Housing Industry Association chief economist Harley Dale. “Any reduction in negative gearing provisions for residential property would increase rents and lower Australian living standards. The capital gains tax exemption for the family home is an indelible part of Australia’s social fabric as well as its economic system”…

Someone needs to educate him to the fact that those buying rental properties have only continued to increase their purchasing of pre existing dwellings since Ng was reintroduced, though his views on the tax free status of the primary residence will resonate with the voters.

I have to say I'm surprised at how the poachers have turned into game keepers. Doubt Abbott was expecting anything like this to be dumped on him. Lets hope the Govt has the intestinal fortitude to push through most of what Murray has recommended. Certainly a better use of political capital than continually reinventing PPL to continued calls for its dropping.

Removing gearing for super would be good.

Am sure the FIRE sectors will be lobbying Govt ministers full time during the summer holidays.

 

[Wysiwyg]

I have to say I'm surprised at how the poachers have turned into game keepers.

ASIC boss Greg Medcraft used those words when referring to his earlier years in America. His address was to the Press Club about the Financial Services Industry, insider trading etc. Must have been stretching the rules a bit eh.

 

[sptrawler]

Removing gearing for super would be good.
.

Super funds gearing into property is going to end in tears, I wonder why Gillard allowed it?

Syd, with these non recourse loans that SMSF are using, does that mean the trustee has to use their own property as collateral?

If that is the case, it is just another 'rope the dope' excercise, they are propping up the property bubble and risking their PPR.

Just shows storm financial is alive and well.IMO

What's the end game? Industry funds can say SMSF trustees are incompetent, when it goes 'belly up'?

 

[Junior]

Super funds gearing into property is going to end in tears, I wonder why Gillard allowed it?

Syd, with these non recourse loans that SMSF are using, does that mean the trustee has to use their own property as collateral?

If that is the case, it is just another 'rope the dope' excercise, they are propping up the property bubble and risking their PPR.

Just shows storm financial is alive and well.IMO

What's the end game? Industry funds can say SMSF trustees are incompetent, when it goes 'belly up'?

Limited Recourse means the bank can't pursue other SMSF assets, i.e. only the property used as security. However, in the event the sale of the property doesn't extinguish the loan, they can pursue the member's assets including PPR.

Most geared SMSFs would have the property at max 80% LVR, and with SG contributions being paid into the Fund and other SMSF assets aside from the property, it would take significant change in circumstances for default to occur AND for the LVR to be >100%.

Not saying it can't happen, but IMO it would take a significant increase in interest rates/unemployment and/or significant fall in property values before widespread carnage would occur in that space.

Having said that I agree super funds shouldn't be allowed to borrow. If you want to borrow there's plenty of options available without using preserved super benefits.

 

[sydboy007]

Super funds gearing into property is going to end in tears, I wonder why Gillard allowed it?

Syd, with these non recourse loans that SMSF are using, does that mean the trustee has to use their own property as collateral?

If that is the case, it is just another 'rope the dope' excercise, they are propping up the property bubble and risking their PPR.

Just shows storm financial is alive and well.IMO

What's the end game? Industry funds can say SMSF trustees are incompetent, when it goes 'belly up'?

Technically Howard introduced gearing into super, Labor just opened the door wider by allowing the non recourse loans.

My understanding is a lot of the non recourse loans are moving the liability to the Trustees assets outside the SMSF. To my mind they're not truly non recourse, but so far this has been allowed to happen.

I suppose the whole gearing into property within SMSFs is really just an extension of the tax issues surrounding property that Murray has highlighted.

It will be interesting to see how it all pans out. I think the voting power of those who have SMSFs would be so considerable I doubt the Govt would be willing to take them on in terms of limiting access to them. You could make an argument though that there should be some form of education process and certification prior to someone starting up an SMSF so that they fully understand their role as trustee and the various investment options they have access to. If you can explain why the value of a bond changes inversely to changes in interest rates, you probably don't have the financial nous to run your own investments competently.

 

[sptrawler]

Thanks Junior and Syd, for the explanation.

 

[Bill M]

We are still a nation of bad savers and Super may not be the ultimate cash cow after all but without it I think we would be much worse off.

---
The global survey of 16,000 showed Australians expect their retirement to last an average of 23 years, but their savings and investments are on track to run dry within 10 years, making it the largest gap in Asia and the fourth largest globally.

The research also revealed more than half of the nation has never saved specifically for retirement outside of compulsory superannuation.

"Australians are in denial about retirement planning," HSBC head of retail banking and wealth management Graham Heunis said.

https://au.news.yahoo.com/thewest/business/national/a/26032489/aussies-face-13-year-retirement-shortfall/
---

 

[Julia]

The News.com.au report on this also added:

he Association of Superannuation Funds of Australia’s Retirement Standard said for Australians to have a “comfortable” retirement single people need $430,000 in retirement savings and couples need $510,000.

An ASFA spokeswoman said people are living longer in retirement than ever before ”” the average life expectancy in Australia is 83 ”” and they need to prepare for this.

I don't think I'm extravagant at all, but I wouldn't like to be retiring at 65, living to 83, and funding it on only $430,000.

I wonder what the main reason behind the lack of retirement savings is: lack of interest - an uninformed assumption that when retirement eventually occurs the age pension will be just fine, thanks?

Or cost of living too high for people on lower and middle incomes to be able to save more than the compulsory amount?

If self funded, some frustration at not being able to access concessions available to pensioners on rates, pharmaceuticals etc? As a result reportedly numbers of people spend some money in order to qualify for just the minimum age pension so as to acquire access to the concessions.

 

[Tooth Faerie]

The News.com.au report on this also added:


I don't think I'm extravagant at all, but I wouldn't like to be retiring at 65, living to 83, and funding it on only $430,000.

Me neither. That does not seem "comfortable" at all.

I wonder what the main reason behind the lack of retirement savings is: lack of interest - an uninformed assumption that when retirement eventually occurs the age pension will be just fine, thanks?

Or cost of living too high for people on lower and middle incomes to be able to save more than the compulsory amount?

Personal observations (anecdotal), it seems to be a bit of both.

Personally, I'm on a pretty low income but I'm able to save at least 50% of my income because I'm still living at home and read Sir O's budgeting post. My income would be mostly be used to survive if I had to live on my own.

 

[sydboy007]

The News.com.au report on this also added:


I don't think I'm extravagant at all, but I wouldn't like to be retiring at 65, living to 83, and funding it on only $430,000.

I wonder what the main reason behind the lack of retirement savings is: lack of interest - an uninformed assumption that when retirement eventually occurs the age pension will be just fine, thanks?

Or cost of living too high for people on lower and middle incomes to be able to save more than the compulsory amount?

If self funded, some frustration at not being able to access concessions available to pensioners on rates, pharmaceuticals etc? As a result reportedly numbers of people spend some money in order to qualify for just the minimum age pension so as to acquire access to the concessions.

$430K should be providing a 5% return, and it's still possible to get some bonds providing around the 6% yield.

That would provide around $21.5K in income each year

Under this scenario they would receive a $13K part pension, for a total income of $34.5K. Definitely quite liveable when you don't have a mortgage and other expenses are modest. Then factor in the many savings pensioners get for eg council (~$250) / water ($200+) / car rego ($200+). In NSW you can also get a $235 rebate on your electricity bill over the year, and travel all day on public transport for just $2.50, which could add up to an extra $1000 of income equivalent.

This would compare to someone earning a pre tax income of $38244. That would put you in about the middle of the 6th income decile ie you're in roughly the top third of income earners in the country.

I think these days the cost of rent and mortgages is making it very difficult for people to save extra. The issue is likely to get worse as income growth stalls and turns negative, interest rates continue to get crushed, and bond yields continue to tumble.

 

[qldfrog]

Syd I disagree with your figures:

$430K should be providing a 5% return, and it's still possible to get some bonds providing around the 6% yield.

That would provide around $21.5K in income each year

5% return before inflation;
take into account inflation and you get half that return in actual relevant dollars.
so you will earn less than half your quoted figures in inflation adjusted dollars : around 10K in 2015 dollar equivalent;
That may at best cover your utility costs/insurances and home maintenance costs if you are lucky not to have any morgage or renting costs
you then basically fully rely on the pension for your meal
good luck!
PS I do not include any taxation on income at all.

 

[sptrawler]

$430K should be providing a 5% return, and it's still possible to get some bonds providing around the 6% yield.

That would provide around $21.5K in income each year

Under this scenario they would receive a $13K part pension, for a total income of $34.5K. Definitely quite liveable when you don't have a mortgage and other expenses are modest. Then factor in the many savings pensioners get for eg council (~$250) / water ($200+) / car rego ($200+). In NSW you can also get a $235 rebate on your electricity bill over the year, and travel all day on public transport for just $2.50, which could add up to an extra $1000 of income equivalent.

This would compare to someone earning a pre tax income of $38244. That would put you in about the middle of the 6th income decile ie you're in roughly the top third of income earners in the country.

I think these days the cost of rent and mortgages is making it very difficult for people to save extra. The issue is likely to get worse as income growth stalls and turns negative, interest rates continue to get crushed, and bond yields continue to tumble.

Jeez Syd, I thought your ideas were rough, but they're really generous compared to what is being suggested.

http://www.abc.net.au/news/2015-04-02/millane-pension-deal-an-offer-hard-to-refuse/6368830

A short extract:

The proposal, put forward by the Australian Council of Social Services (ACOSS), is to tighten the pension assets test by lowering the asset-free threshold for people who own their home, and to increase the taper rates so that eligibility for a part pension cuts out sooner. This also means that eligibility for the Seniors Health Card and associated benefits cuts out sooner too.

This is a prudent recommendation because it will only affect wealthy pension recipients - those who own a home (of any value), with additional assets of $100,000 or more for singles and $150,000 or more for couples. For Morrison, it is also appealing because it avoids the debate about whether to count the family home in the means test. My bolds

Beautifull, just beautifull, $100k and your pension start reducing, magic, why save?

There won't be many people putting extra into super at the moment, and if they are, they need their heads read.lol

The Government will be in serious strife, if they floated the lunacy ACOSS is suggesting. It just changes super from a retirement enhancement system, to pension self funding system.
Absolute lunacy.

The first thing people will be doing, is seeking permission to withdraw contributions, made after tax.

 

[banco]

Jeez Syd, I thought your ideas were rough, but they're really generous compared to what is being suggested.

http://www.abc.net.au/news/2015-04-02/millane-pension-deal-an-offer-hard-to-refuse/6368830

A short extract:

The proposal, put forward by the Australian Council of Social Services (ACOSS), is to tighten the pension assets test by lowering the asset-free threshold for people who own their home, and to increase the taper rates so that eligibility for a part pension cuts out sooner. This also means that eligibility for the Seniors Health Card and associated benefits cuts out sooner too.

This is a prudent recommendation because it will only affect wealthy pension recipients - those who own a home (of any value), with additional assets of $100,000 or more for singles and $150,000 or more for couples. For Morrison, it is also appealing because it avoids the debate about whether to count the family home in the means test. My bolds

Beautifull, just beautifull, $100k and your pension start reducing, magic, why save?

There won't be many people putting extra into super at the moment, and if they are, they need their heads read.lol

The Government will be in serious strife, if they floated the lunacy ACOSS is suggesting. It just changes super from a retirement enhancement system, to pension self funding system.
Absolute lunacy.

The first thing people will be doing, is seeking permission to withdraw contributions, made after tax.

It's not the people putting extra into super the government needs to worry about. I'd be surprised if banning all extra super contributions didn't improve the Government's fiscal position as the money they would lose from tax concessions is likely to outweigh they money they'd otherwise by paying out in pensions etc.

 

[sptrawler]

It's not the people putting extra into super the government needs to worry about. I'd be surprised if banning all extra super contributions didn't improve the Government's fiscal position as the money they would lose from tax concessions is likely to outweigh they money they'd otherwise by paying out in pensions etc.

I agree with you, the problem is what about the blue collar workers, who have been saving in super rather than the bank?

It is still their money, if they paid full tax on it, well it is like putting it in the bank, isn't it?

If they stop lump sum withdrawals, will it include the tax free component?

 

[Ferret]

Beautifull, just beautifull, $100k and your pension start reducing, magic, why save?

There won't be many people putting extra into super at the moment, and if they are, they need their heads read.lol

I really don't understand this sort of thinking. What's wrong with aspiring to be a self-funded retiree?

I have no intention of ever taking any pension and living off the fairly meagre income that would allow that. My aim is to have enough retirement funds to generate an income many times in excess of the pension.

Getting funds into concessionally taxed super will help achieve this, so it makes perfect sense to be putting extra in now.