Minister Jane Hume on SMSFs and superannuation reform

The Government which states categorically that it will LEAVE Superannuation alone and not make any further changes
to SUPERANNUATION will get my vote !
The whole issue is so fluid and so constantly "under review" and uncertain that it makes running a SMSF a constant worry !
.
The "infringement penalties" are real though.
The rest seems to be "smoke and mirrors" and a real disincentive , especially if "one" wants to relax and enjoy their retirement.
Alternatively , SCRAP COMPULSORY SUPERANNUATION COMPLETELY , give everyone a "Universal Pension"
[ with no means testing ] and DISTRIBUTE the alleged or "so called" taxation generosity of $43 Billion to EVERYONE OF PENSIONABLE AGE and simplify the "industry" by cutting out all the "administrative people" who would no longer be needed to administer the various "means tests" [ that would certainly provide extra funds to distribute ! ] OR just leave it alone !
Is that REALLY too much to ask ?

The government acted swiftly during Covid and put in policies that helped Australians survive in a much better way than others.
Their decision to allow SMSF retirees and others withdrawing pensions from their funds to half their required amount according to their age has helped a lot by preserving their capital when the markets were falling.
We urge the Government to extend this policy for at least another 2 years so that we can by then come to a strong footing.
Another way Government can make a real difference to self-funded retirees is to issue them CSHC permanently irrespective of their incomes which have dropped significantly in the low-interest environment.

I feel an important issue for many SMSF retirees is the minimum drawdown rate in pension mode.
The pension draw down rates were set in another era where bank deposit rates, rental yields, bond rates and dividends where all much higher than today. By my calculations, a Superfund trustee invested equally in the above four asset classes would return under 2% per annum today compared with over 5% pa around 10 years ago.
So why set the minimum drawdown rate at 4% (for 60 year olds)? A trustee who carefully planned their asset allocation to return 4% pa to fund their retirement is now finding their return is more in the realm of 2-3%, so why not set that as the minimum drawdown rate?
The problem is that capital appreciation in asset prices, especially over the past year, has inflated balances and made it hard for trustees to reach the minimum drawdown rates.
For an investment allocation not reaching a 4% return, trustees must sell some of the capital to make up the difference.
This ‘decumulation’ concept may sound good in theory if you have an industry fund, but for SMSF retirees who may own property as part of their asset allocation, it could prove quite difficult as you can’t sell the laundry to find that extra cash.
This situation could force retirees to sell down assets prematurely to get cash.
Whilst it may sound good for a couple to have say $2m in super, that may well be made up of assets such as property which only return relatively low net rental yields of 2% or less after expenses.
A couple such as this could probably live comfortably on a 3% return of $60k per year, rather than stressing to find that extra $20k to reach $80k that meets the 4% minimum.
To its credit the Aust Govt realised this issue during Covid and halved the minimum drawdown rates for these past two financial years. These ‘half rates’ however should continue until such time as asset returns begin to increase sometime in the future.

Ray raises an important point. The mandatory pension cash drawdown from a super pension bears no relationship to the income the fund actually earns. In fact, the mandatory percentage increases with age. At age 60 it is 4%, at age 80 it is 7%, at age 90 it is 11%, and at age 95 it is 14%. This requirement is the quid pro quo for the pension fund benefiting from zero tax on its income. Therefore, it is only a matter of time before assets need to be liquidated to meet this annual mandatory withdrawal in cash. A super pension fund has been designed to progressively remove assets from this tax haven.

Note that while this money needs to be removed from the pension fund, there is no requirement to spend it. Managing these progressive cash withdrawals highlights the difficulty of holding lumpy assets such as residential property in a pension fund.

Failure to meet this mandatory requirement will result in the pension fund losing its tax-free status and consequently will be taxed as an accumulation fund where the income is taxed at 15%. On the other side of the coin, an accumulation fund has no obligation to withdraw cash and can be left to grow indefinitely.

I don't think drawdown rates were ever intended to be aligned to returns. Instead it is to ensure assets are removed from the concessionally taxed environment. As the Government keeps reiterating the scheme is not their to accumulate assets to transfer to the next generation given the tax concessions granted. If a large percentage of a SMSF assets are tied up in property this probably indicates an asset allocation issue and not just for liquidity reasons but also diversification. Short term changes in the market shouldn't force assets to be sold down to meet pension payments. E.g. approx. 2 years of pension payments in appropriately liquid assets.

Ray, I could not agree more. The governments do not want money passed on to the next generation. Yet the young generation think the baby boomers are greedy as it was so easy to accumulate money, receive inherited money and those boomers are living longer to their disgust and spending it!!! Shock horror. They believe they should mind grandchildren while they work. For some reason if you were frugal and worked hard, you get punished for it. There is an ill feeling towards retirees by the younger generations. Governments see the accumulated monies by retirees and want it. Hence dividends are up for grabs. Take away dividends and try running your smsf on 1% interest and 2% bonds - really, plus demanding you take out more than you wish to, to be frugal, is not allowed. As it is the cap placed on retirees also unfair if you are at the bottom of the pile. Married couples get to hold $1.5m each and pay no tax but if you become a widow, you pay tax on the other half. Honestly when I think I have paid high taxes (yes you younger lot thinking it is easy - plus higher interest on homes) I get no medical card as they changed the rules nor do I get the government handouts of money that goes to most retirees., when they feel like being generous. Tax and take from the workers but give more to the lazy dole bludgers without rules!! ie forever.
Yes, Ray, a least let us keep reduced draw downs when times re interest are being held down!!!! reducing our income and endangering our portfolios by having to resort to higher risk assets to try and survive. Honestly what happened to a fair go and support for the Australians who worked hard and saved and paid high taxes.

"try running your smsf on 1% interest and 2% bonds":

Start retirement with adequate capital, withdrawing equivalent of, but not eligible for, Age Pension from 67 to 95 :
= PV((1+2%)/(1+1%)-1, (95-67), 40000, 876500, 0)
= -$1,639,169.52 (-=invested into fund)

"demanding you take out more than you wish to, to be frugal, is not allowed":

Neither spending withdrawals nor dying with no capital is compulsory.

"Married couples get to hold $1.5m each and pay no tax but if you become a widow, you pay tax on the other half.":

Withdraw other half and stuff it into home.

"a least let us keep reduced draw downs when times re interest are being held down":

Seems reasonable.

"reducing our income and endangering our portfolios by having to resort to higher risk assets to try and survive":

The cost of living for a home owning couple is ~$20,000 per year. Much less than $37,000+ Age Pension. 'The problem' is the cost of entertainment.

SFRs are in the unfortunate situation of needing about $2 million in capital to generate similar income to those receiving the full centrelink aged pension rate !! This is where a universal pension would beneficial as done in many other countries. Plus much less cost to govt to administer.

So scrap superannuation. Make it voluntary, without the tax breaks thereby saving the Govt $43B per yr in foregone tax and increase the Aged, disability pensions (in fact they could double simply by using that $43B) The high income earners will always take care of their future. That way with less in their coffers and not having a guaranteed captive contributor the super funds would have to look after the members they have. Members will just keep coming year after year in the present system whether they want to or not. I found some industry fund people the most arrogant people I have dealt with. The money in ur fund account is not yrs particularly if you don't have dependents. I'll add that I got a $51,753 tax bill on the half of my son's Super and DB that the Trustee gave us, his parents, and the girl who received the other half was tax free. We paid for his funeral, bought his burial plot, headstone, paid all his outstanding bills. She paid nothing. No reason was given and 18 months later still no reply. Under section 10.1 of the SIS Act a beneficiary has to be given a reason and also under 25D of the Acts Interpretation Act 1901. I have been to ASIC (very nice and helpful), APRA (also nice and helpful) and AFCA (twice) nice but useless body in my case. So I think u are better to control ur own money and u can give it to whoever u want. Remember insurance outside super there is no tax to pay. Even retail funds pay to the nomination and if no nomination, pay to the Will. No interference. 

(Identity withheld and personal details removed) "Your Super, Your Future"?? I have a better one "It's Australian, It's Super and It's Yours - Until You Die". My deceased son's superannuation and Death Benefit was given by his super fund to a girl he knew for less than 2 yrs. No marriage, no engagement, no registered relationship, no children biological or step, no shared mortgage, no shared bank accounts, no shared bills, not on his medicare or tax, and he had his parents as his beneficiaries of his Will and his non binding nomination on his fund. Don't anyone tell me he should have had a binding nomination and show yr ignorance of this system but that is also what the Trustee stated in a letter to me. The Trustee also stated he couldn't take the Will into consideration because it had been made 3 yrs before knowing this girl. Superannuation is the biggest rort, and Jane Hume as Finc Services Minister, is not telling the public this. Superannuation should be made voluntary, cut the tax rorts and increase the Aged Pension. Trustees should not have control of "your" money. It is only since Liberals allowed access to super that it has even been considered "your" money. I was told "it is held in trust" therefore not covered by your Will and the Trustee will decide. 

That's why my wife and I have binding nominations.

Marty McSly. If yr beneficiaries are non dependent and you have a binding nomination then that binding nomination becomes invalid. My industry fund states on its website that for a binding nomination to be valid it must be current (i.e hasn't lapsed) and the beneficiaries must be dependent. (with a list of who you can leave yr super to: a spouse incl same sex or defacto, a child of any age incl ex nuptual, adopted, an interdependent or financial dependent. If ur beneficiaries are other than these yr binding nomination is invalid and the Trustee will decide. FYI a person without dependents needs to have a Will and nominate LPR as the beneficiary and mention in the Will who the super and DB is to go to. The downside to this is that a 18, 20 or even 25 y.o. will prob not have Will partic if he has no assets outside Super. Be advised also that if the nominated beneficiary is not dependent the Insurance companies don't have to pay the insurance even tho the deceased member has been paying it for yrs. All of this I have learnt since my son died and his Super was given away by a fund trustee. This situation is intolerable. To force Aus workers to put their money into a scheme with these conditions and yet no-one in the Super Industry or any MP is criminal. You might understand now why I call it a rort! You should be ok tho seeing ur circumstances

You are giving the impression that all that is needed is a binding nomination. Firstlinks has published two of my blogs on the downsides to compulsory super which might rattle the herd. You might also look to the future in case you re-partner or have a child who has lived independently and then dies from an unknown genetic condition and you find siblings have the same condition and will need lifelong support as my other son and grandson are needing. It is this everyone needs to guard against. Unless you have a crystal ball. Good luck, i hope ur life runs smoothly.

591,000 self-managed super funds accounting for $728 billion - or $1.2m average balance - this is a bit misleading.

If we assume that 20% of members hold 80% of assets in those fund, this would mean that
the bottom 473,000 of people, the mums and dads and smallest business owners hold 145 billion - or $300,000 average balance.

I don't believe political parties of all persuasions understand the impact of low interest rates on self funded retirees. I have two family members in their mid seventies who are very conservative in their investment portfolios, mainly fixed interest and bonds with minimal shares. As interest rates have fallen so has their income. With the help of their financial advisor they have upsized their homes through significant extensions, increasing value, and in the process now qualify for the age pension, receiving a steady income and all other benefits eligibility provides. The increase in capital value of their homes maintains their capacity to fund moving to age care in the future if required, while providing increased stability in income. This outcome, while appropriate for them, increases the impost on government and taxpayers.

Spending excess capital on a home renovation to qualify for the Aged Pension is a long term play, as the money spent on the reno will usually remain an assessible asset for 5 years. That's a long time to wait for the first pension cheque.

Why is it an assessable asset? I would have thought it was your residence an exempt asset paul

what is the status of the "bring forward" legislation that was held up by Covid? Is this likley to be grandfathered considering the delay in enacting this legislation?

Exactly. Minister Hunt did not address this burning issue. I received a letter from her office dated 7/7/2020, stating that the Government remains committed to passing the enabling legislation in it current form, with effect from 1/7/20. Her reply did not explain why passage is stalled, given it is a simple bipartisan change. Covid's impact on Senate sittings, presumably. Her letter stated that should the legislation fail to pass this FY, contributions reliant on the change could be withdrawn without incurring excess contributions tax, although tax would be payable on any related earnings, at personal marginal tax rates.

"For me the early access to super scheme rolled out during Covid-19 also demonstrated a strong and welcome indication that Australians are becoming more engaged with their superannuation and retirement planning." Brilliant! They became more engaged because we enticed them to opt out. Some might consider that "ending an engagement."

It would have been interesting to understand from the Minister if the deeming rate and minimum pension pension payable will be subject to further review noting interest rates etc will be kept artificially low by the Reserve Bank until 2024.

Michael, I agree about the deeming rate, getting deeming rate to reflect what is happening to interest rates could help buffer retirees and reduce the need for riskier investments

But not for self-funded retirees!