[Editor's note: this is a comment received to Cuffelinks' 'Have Your Say' section. It has not been edited. It serves as a reminder on the type of correspondence Chris Bowen's office is receiving.]
SMSFs in pension mode are required to drawdown from the Fund each year an increasing minimum amount on a percentage basis. I suggest that the original rationale for that imposition is increasingly less relevant or fair in today’s world. The drawdown regulation was clearly to avoid members accumulating increasingly large asset bases through a tax-exempt superannuation system and consequently understandable. However in light of developments since, it is surely time to reconsider and adjust the drawdown levels and assessment methods. The relevant factors are detailed below and cumulatively adversely affect the longer-term confidence of many SMSF retirees in their Fund’s ability to deliver the sort of security for their older age needs that they had planned for.
1. The numerous Government changes imposed on SMSF superannuation in particular have reduced the levels of attraction for SMSF-type retirement saving - in a stable income accumulation and pension sense. The latest being the relatively recent $1.6 million total asset cap. In an increasingly less stable world achieving responsible income and asset growth return is a much riskier and uncertain process – especially when the asset total is now capped at a lower level for many whose hard work and saving for retirement had planned on a more liberal asset base regime. Although a one-off government pause was applied belatedly during the GFC, there are no guarantees of similar “legislative pauses” for future significant downturns – even though each such adverse investment period significantly reduces the asset base on which retirees rely for earning their anticipated incomes. Importantly, the older they are the less likelihood they have of ever “repairing” that unplanned asset loss.
2. Retirees’ likely life spans are increasingly longer for many. Investment return volatility and downturn risks pose very real concerns for many self-funded retirees about whether they will be able to rely on income levels for which they had planned until death. Actuarial calculations on which SMSF legislation rules are predicated on, use statistics that are some 3 to 5 years in arrears of current experience and in any case questionable when for instance similar UK statistics are compared to Australian. Despite Australia being considered a healthier country than the UK as proved by underlying statistical evidence the UK actuarial tables favour greater longevity and that in turn affects government legislation in respect of superannuation entitlements. That important actuarial discrepancy adversely determines the government’s annual compulsory drawdown percentages against Australian retirees.
3. The announced Labor pronouncements relating to franking and related tax effects would further adversely impact SMSF retirees’ earning and asset base and consequently add further stress on their ability to earn income sufficient for their living span.
Conclusions
Australia’s superannuation regime since inception has become increasingly less certain as the medium to save for retirement with confidence. Government has contributed to that uncertainty through rule/tax changes which disadvantage most self-funded retirees. The effect of #1 through #3 above only heighten self-funded retirees’ fears that what they had saved for will be inadequate for their lifespan due to increasing longevity, government superannuation changes, less stable investment environments, and outdated annual mandatory drawdown regulations that unfairly disadvantage those who chose to be self-reliant and independent of government benefits through hard work and saving. Much about Australia’s superannuation regime remains questionable and in need of drastic review – particularly from a self-funded retiree standpoint. But a critical urgent starting point should be a review of the underlying rules/rationale for the current annually increasing mandatory drawdown levels to reduce the risk to many SMSF retirees of their savings 'bankruptcy' before they die.
Lastly – in the overall Australian superannuation regime context, it is surely reprehensible that politicians and government employees generally continue to enjoy far superior retirement plans and benefits which also often guarantee benefit levels. The historical contexts for such benefits have long since ceased to apply. Most Australians I’m sure would welcome public employee superannuation benefits that more equitably relate to those applying to Australians in general.
Carlo Bongarzoni is Principal of management consultancy firm, Carlo Bongarzoni Associates Pty Ltd.