"How safe is my super from changes to the regulations? What do you think the government has in store for us?" The person who asked me these questions is an executive in his early 50s who is busily trying to get his finances in shape to retire at age 65.
For a person of his age I am not overly concerned. There have been non-stop changes to the superannuation system since it became universal more than 25 years ago, but there has been no element of retrospectivity. Yes, there are many voices now saying the system is too generous, but they tend to be focusing on those few people who have more than $5 million in super, and who are certainly not representative of the majority.
So what can we expect? The government has promised no changes in their present term but this has only a year to run at most. Opposition Leader Shorten has already announced Labor’s intention to increase the contribution tax to 30% for people whose adjusted taxable incomes are in excess of $250,000 a year. This is not a huge leap from the present system where the 30% tax applies to people with incomes of over $300,000.
Under the present system, there is a 15% tax on earnings from superannuation funds in accumulation phase but this reduces to zero once the fund enters pension mode. Under the Gillard government there was a proposal to tax the income of a pension fund once fund income exceeded $100,000 a year per member. This was a fairly mild proposal because the 15% tax was only on the excess income over $100,000. But the predictable outcry ensued, and the proposal did not become law.
It is now Labor policy to reintroduce this tax but they have made it tougher – it will apply once income exceeds $75,000 a year. Given the failure of the last attempt, the chances of this getting through must be considered slim, but even if it did, it’s probable only a few would be affected.
Think about a couple with $4 million in super, with a portfolio that is spread in a conventional manner between cash 30%, local shares 35%, international shares 25%, and listed property 10%. The income including franking credits would be around $73,000 each, which would still keep it under the threshold for Labor’s new tax. I suspect when they start doing the numbers, they may come to the conclusion that the gain is not going to be worth the pain.
The Association of Superannuation Funds of Australia (ASFA) proposes that money in pension phase be capped at $2.5 million per member. It might be easy in theory but devilishly difficult in practice. Is the intention to take the balance at June 30 and simply switch the excess, if any, to accumulation mode? If the market has a sudden fall or rise, or if there is a big withdrawal, do you have to go through the whole process again? But once again we’re talking about balances of $5 million and over, which is hardly likely to worry mums and dads.
Emails arrive continually from people who are concerned that the government will change the rules to prevent withdrawal of lump sums. I do think at some stage in the future the government of the day might decide to compel retirees to take part of their superannuation as an income stream, but that may be a long way off. It would be a brave government who would compel retirees to lock up part of their retirement funds in an annuity when interest rates are at historic lows.
Yes, more change is inevitable. In my view, the biggest risk for most retirees is an overemphasis on cash in their portfolio because they are averse to risk. Many retirees can now expect to live 25 years or more after they retire. For them, holding money in cash may be one of the riskiest strategies of all.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. See www.noelwhittaker.com.au.