Note: This article was originally published on 18 December 2015. With both the Government and the Retirement Income Review arguing superannuation should be used to fund retirement, even if it means running down capital, rather than leaving a bequest, a rerun is timely. In addition, Paul Keating said last week:
"I designed the system. I used to say to the caucus of the Labor Party, what superannuation is about is personal empowerment. That is you can cut the shape of your life, particularly at the end of your life, without reference to a government agency ... I think people in retirement think in family terms."
In October 2015, the Government announced that it would enshrine the objective of superannuation in legislation, as recommended by the Financial System Inquiry (FSI). This has never happened.
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Have you ever been in a meeting where everyone in the room, except you, seems to agree on something? You wonder whether you should keep quiet or start asking a few probing questions. I sat through half a day of speeches before launching into my own special version of the truth, much to the dismay of other delegates.
It was in June 2015 at the inaugural conference of the newly-formed Committee for Sustainable Retirement Incomes (CSRI) where everyone else seemed in furious agreement that we not only need to define a ‘purpose’ or ‘objective’ for superannuation, but it was obvious what it was. As the Committee’s Chairman, Michael Keating, wrote later:
“The FSI [Financial System Inquiry] recommended that the objective of superannuation should be to provide ‘income in retirement to supplement or substitute the age pension’, and there is an emerging consensus that superannuation should be directed to providing a retirement income and not other benefits, including bequests.” (my emphasis).
Whatever the future, that was not the past
Is that right? It that the consensus? Not for me. I have been putting money into superannuation for 20 years without an expectation that I will need the majority of it ‘to provide a retirement income’. It’s a tax-effective place to save, entirely within the rules, and I have foregone current consumption to secure my future and avoid any likelihood of being a drag on the public purse.
For many people, superannuation is both funding a retirement and leaving a bequest. It’s a piggy bank, a store of wealth, with a strong expectation there will be plenty left over beyond retirement income to give to their children or heirs. Why is it different to the favourable taxation rules around owner-occupied housing, or to a lesser extent, negative gearing, or family trusts? I could have bought a harbourside home and enjoyed tax-free capital gains, but instead I chose superannuation. If we are defining ‘purposes’, we should look at the entire package of different taxes and benefits, not only superannuation.
My view may even be part of the majority in the real world. At the recent 2015 CSIRO and Monash University Superannuation Research Cluster, a study reported that 90% of the amount an average retiree enters retirement with (including family home and non-super) remains unspent upon their death. On 23 May 2015, The Australian Financial Review quoted Treasury work which found that most people still have around half of their superannuation balances at the time of average life expectancy.
So the ‘purpose of superannuation’ is far from settled based on actual experience, and while it may fund part of a retirement, it is at least as likely to become a bequest.
What did David Murray say?
David Murray and the FSI identified a major deficiency of superannuation being the lack of a clearly articulated objective to guide policy. Recommendation 9 states:
“Seek broad political agreement for, and enshrine in legislation, the objectives of the superannuation system and report publicly on how policy proposals are consistent with achieving these objective over the long term.”
That’s a high bar for the ‘objective’ to jump over, and a major challenge for the government. It goes on to say, “Superannuation is a vehicle for individuals to fund consumption in retirement largely from working life income.” Not much sympathy for bequesting there.
What does the Superannuation Complaints Tribunal say?
The government agency charged with adjudicating on superannuation disputes is the Superannuation Complaints Tribunal (SCT). In its Annual Report 2014-2015, it writes:
“There are some common misconceptions about superannuation death benefits that can result in unexpected outcomes for the beneficiaries of a death benefit, and may result in a complaint being made to the Tribunal. The most common misconception, arguably, relates to the purpose of superannuation. Broadly speaking, the purpose of superannuation is to provide income in retirement to members and their dependants; it does not form part of a person’s estate. Accordingly, a superannuation death benefit should be paid to dependants and those who had a legal or moral right to look to the deceased member for financial support had they not died.” (My emphasis. Thanks to Robin Bowerman of Vanguard for this point).
There it is … “and their dependants”. Sounds like a bequest to me. The SCT is an independent government body that deals with complaints relating to the decisions trustees make in relation to superannuation, and of the 2,700 complaints processed in 2014/2015, 29% were about death payments. A large amount of its work, therefore, is sorting out who should benefit from a bequest.
Superannuation specifically acknowledges bequests
Superannuation legislation has specific features designed for appropriate bequeathing. For example, Binding Death Nominations (BDNs) ensure superannuation is distributed according to the wishes of the deceased member, not at the whim of a new trustee of the fund or executor of the estate. Superannuation is not an asset of the estate and a trustee is not obliged to follow directions in a will, even if super is specifically mentioned in the will. The instructions in the BDN define the money flow.
The main reason a superannuation death benefit is paid directly to a dependant rather than the estate is to ensure other people (creditors, claimants for bankruptcy, etc) cannot access the payment benefits provided to a dependant.
In fact, the superannuation rules themselves facilitate bequests to non-dependants. There is no restriction on withdrawing money from superannuation for anyone who has reached preservation age and satisfied a condition of release (including retiring). However, on death, if it is given to anyone other than a spouse or a dependent child, there is a tax (on the taxable component) of 15% plus the Medicare levy (currently 2% for most people). The obvious approach is to gift it before death, if possible. Continuing from the Treasury work quoted in the AFR as above:
“People typically don't die all of a sudden. They might know it is coming so they draw down at least some of their super in advance and gift it to others to avoid the 16% tax that is payable if you leave your super to independent children or people other than your wife or dependent children," one source said.”
Conclusion
A potential benefit of this debate about the ‘purpose of super’ is to force each person to consider their own objectives, but we will be sorely disappointed if we think this will create consensus. I know what my purpose is, I know what David Murray’s purpose is, and I know what Michael Keating’s purpose is. But most importantly … what’s yours?
Graham Hand is the Managing Editor of Firstlinks. This article is general information and does not consider the circumstances of any investor, and has not been edited since its first publication in 2015.
The Superannuation Complaints Tribunal mentioned in this article has ceased operations. New complaints should go to the Australian Financial Complaints Authority.