In response to the Murray financial system inquiry, the government wants to develop legislation to enshrine the objectives of the superannuation system. This is a noble aim and long overdue, but the Treasury discussion paper suffers from a blinkered and limited perception of the wealth creation and savings objectives of ordinary Australians.
Most Australians now struggle to achieve home ownership and build up sufficient assets to fund a comfortable retirement. This task is likely to become harder with likely low investment returns.
Focusing solely on the fairness, adequacy and sustainability of the superannuation system, as Treasury proposes, runs a grave risk of ignoring the fundamental defects in our retirement savings system.
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Whichever party wins this year’s election, one thing’s already certain: there will be major changes to superannuation, including future taxation arrangements. Even more unsettling is the prospect of further changes in future years.
Worst affected by this prospect are younger and middle-aged taxpayers forced to put money into super by compulsory employer contribution arrangements. This large part of their remuneration is tied up, untouchable until the age of 60 or an even later retirement, and subject to a taxation regime that will almost certainly be different from that prevailing today.
Recent Rice Warner research concluded that low-income young taxpayers would be better off at 65 by receiving compulsory super than having additional money to pay off a house mortgage.
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There’s a long history of discrimination against women in Australian superannuation. While the advent of compulsory super and improved unsupported contribution arrangements have helped reduce the gross disparity in account balances between men and women, this disparity remains.
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The ongoing tax reform debate has created new difficulties for making medium-and long-term investment decisions. If elected this year, Labor will from July 1, 2017, limit access to negative gearing tax deductions to purchases of newly constructed properties and substantially increase capital gains tax liability on assets acquired after that date.
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Last week’s speculation that the federal government was planning to freeze the compulsory super contribution permanently at 9.5 per cent of salary was just that – speculation. Given that existing legislation freezes the compulsory employer contribution at this level until July 1, 2021, more than two elections away, this possibility is irrelevant to current financial plans.
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Far from being a tax dodge, the ability to start a superannuation pension while still working encourages people to stay in the workforce for some time. With our ageing population and the higher age pension eligibility age of 67, such assistance to help people to work longer offers a major benefit to the economy.
Critics of the current arrangements focus on the fact that receiving a tax-free funded superannuation pension after age 60 as well as an ongoing wage income reduces tax collections. This assumes people would continue to work and earn the taxable income if they weren’t able to commence a transition to retirement pension.
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Listen to Dixon Advisory’s Superannuation Advisors Daryl Dixon and Nerida Cole in conversation with broadcaster Tony Delroy on his ABC program, Nightlife.
In this latest podcast they discuss how the ever-increasing volatility of Australian and global share markets will affect super funds which are heavily weighted to the stock market; they also talk about what has influenced the volatility and compare the relatively stable returns of the past 12 months to what may lie ahead for Aussie investors.
Daryl and Nerida also give some tips to those who are considering retirement in the next year or so as to what they should be aware of, including geo-political risks, US and European markets and banks and how to plan accordingly. Daryl and Nerida appear on Nightlife regularly throughout the year to give listeners their financial insights.
Listen to the podcast here
As highlighted last week, defined benefit super fund members can get substantial benefits from making voluntary super contributions.
The situation is different for other super fund members, such as those in the private sector and federal public servants employed after July 1, 2005, and for new military employees after July 1, 2016, when entry to the MSBS will be closed off. Their employer super funds are accumulation-based.
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The past month’s world sharemarket falls highlight the good fortune of the federal government’s defined benefit super fund members. While they may miss out on booming share and property markets, they completely avoid all the worry and concern when markets plunge and know that they will get all the employer benefits promised to them.
By contrast, accumulation super fund members don’t know how much they’ll ultimately build up in their super and savings and for them, paying off a mortgage can be more rewarding than investing in super.
The situation is quite different for members of defined benefit funds such as the CSS and PSS where their final employer benefit is related to their final salary or final average salary. Read more »
Federal government employees who joined the CSS or PSS before entry was closed off in 2005 are in the box seat when funding their retirement. Public sector super scheme members are on to a winner
Federal government employees who joined the CSS or PSS before entry was closed off in 2005 now find themselves in the box seat when funding their retirement.
Whereas previously many were tempted to withdraw their own contributions and, where permitted, their employer contributions as a lump sum on exit, more than 85 per cent of fund members now choose the indexed or unindexed pension options. This trend is likely to continue because of the volatility of financial markets and historically low interest rates. Read more »
Given the ongoing uncertainty about the future tax treatment of superannuation, investing in the family home and gearing investments now offer more certain benefits, especially to younger taxpayers. Most importantly, paying off the family home as quickly as possible offers many benefits, including tax-free capital gains, access to savings at any time and as collateral for tax-deductible investment borrowing.
Owning the family home outright for a day and then re-borrowing against it on an interest-only basis to fund investments has always been an attractive strategy. Doing this ensures the interest payments are deductible at the relevant marginal tax rates, thereby ensuring after-tax debt servicing costs and cash flow demands are minimised.
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Listen to Dixon Advisory’s superannuation advisors Daryl Dixon and Nerida Cole speaking with broadcaster Tony Delroy on his ABC Radio program, Nightlife. In this latest podcast they discuss the current state of the economy and how it may affect your super, how to help your adult children into the property market and how to retire without worrying about your income. Read more »
Far from increasing the fairness of our tax system, Treasury’s latest proposal to replace the flat rate 15 per cent contributions tax by a similar rebate will only increase the tax burden on wage earners relying on compulsory super for their retirement. Everyone else, particularly high-income earners, will be largely unaffected by the change.
Replacing the 15 per cent contributions tax by a 15 per cent rebate increases the tax burden on super contributions by between 4.5 and 19 per cent of all contributions up to the annual cap of $30,000 or $35,000 (50 and over) for taxpayers with taxable incomes above $37,000 a year. The maximum annual tax increase will be $6,650 and a $100,000 annual earner receiving compulsory super would pay about $850 more a year in tax. Read more »
Whatever the outcome of the tax reform debate, the prospects of savers other than investors in the family home are looking very bleak.
Not only are low interest rates and volatile sharemarkets likely to be around for an extended period, making life more difficult for savers, they now face the prospect of being big losers in any increase in the GST tax burden. Read more »
Treasurer Scott Morrison needs to tread warily in evaluating Treasury’s proposals for super tax reform to avoid throwing out the baby with the bathwater.
Already speculation about tax and rule changes is deterring voluntary super contributions by younger and middle-aged Australians uncertain about what the rules will be when they need to access their savings. Who would want to tie up money in super untouchable until at least age 60 when they have a mortgage and other financial commitments?
Without substantial tax concessions, the investment returns and financial security offered by paying off a mortgage will far exceed the benefits of making voluntary contributions to super. Read more »
The government has been criticised for rejecting the Murray inquiry’s recommendation to prevent self-managed superannuation funds from borrowing to buy property. But the concern is misplaced, because there’s so little of it. Banning it would solve a problem that doesn’t exist. That’s because it’s not a good investment strategy, at least for residential property.
Strict governing regulations preclude speculative and high-risk activities. For starters, unlike borrowings in personal names, the regulations require the loans to be issued on a non-recourse basis not backed by personal guarantees. This forces financial institutions to demand larger deposits and charge higher interest rates than for personal borrowings, and to assess the viability of the investment, including the cash flow, new contributions and earnings of other assets in the SMSF. Read more »
Given our banking system has operated joint accounts very efficiently for many years, superannuation industry criticism of the proposals to introduce joint superannuation accounts is disappointing. Read more »
Last week’s mini-summit has increased the odds of further changes to superannuation tax arrangements. What’s not yet clear is whether any changes will be part of a suite of measures addressing all the major tax shelters including the family home, negative gearing and trust structures.
Without also limiting access to the other tax shelters, reducing the superannuation tax concessions will encourage investors to direct their voluntary contributions and accessible superannuation assets elsewhere.
Already, via the 15 per cent contributions and earnings tax, superannuation is more heavily taxed than negative gearing (unlimited tax-deductibility of losses and concessional capital gains tax) and the owner-occupied home (totally tax-free and pension asset- test exempt). Read more »
Millions of present and future retirees would be big winners if the newborn government’s mantra of “work, save, invest” included a rethink of the 2017 age pension asset test changes.
While burgeoning age pension costs are a problem, the already-legislated 2017 changes will encourage many retirees to limit their saving, over invest in the family home or dissipate their assets. Read more »
Recent gyrations in world sharemarkets aren’t unexpected and follow the warnings of major super funds that future investment returns are likely to be lower than they’ve been for several years.
While unsettling for retirees already struggling to cope with historically low interest rates, a more important concern for many investors is the impact of the APRA crackdown on lending to property investors. Read more »
Given the volatility of the share market and a slowing economy, share investors have sound reasons for being concerned about participating in the spate of big bank new share issues.
The problem for many is that with the recovery in share prices following the global financial crisis, existing bank share holdings already make up a high proportion of their share portfolios.
Especially for investors whose portfolios are already overweight in Australian shares, the incentive to pass up the new investment opportunity is strong.
Investors in the National Australia Bank new issue have seen the share price retreat since the issue. Similarly, ANZ Banking Group share price fell considerably after a raising from institutional investors. Small investors are now being offered a share purchase plan to acquire up to $15,000 of new shares at the now lower share price.
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Millions of ordinary Australians will not necessarily benefit if our politicians accept the superannuation industry’s latest campaign for a bipartisan agreement to increase the compulsory super rate from 9.5 per cent to 12 per cent of salary by 2022. There’s only one certain outcome from doing this, namely enhancing industry profits and control of other people’s and the nation’s future by an already very large funds management industry.
Particularly artificial are the purported calculations of how much money ordinary Australians will lose by not receiving more compulsory super. Among other things, these calculations assume continuing high rates of investment return and no other change to employment conditions or wages.
There are no comparisons of the returns from super with, for example, the returns from other investments, such as paying off a home loan more quickly. The real-life situation is that higher employer costs will make it more difficult for people to obtain and retain their jobs and achieve growth in their living standards.
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Controversy over whether or not an average couple needs $1million in super to retire comfortably misses the point that, for many, this is an impossible target. If anything, the challenge of funding a comfortable retirement has become more difficult because of lower interest rates, volatile investment returns and the latest asset test changes.
Even for middle and higher income earners, the obstacles to funding a comfortable retirement are considerable, especially now that many retirees can expect to live into their late 80s.
Remaining employed until late 60s involves funding retirement for a minimum of 20 years.Retiring at age 60 requires capital to fund a 30-year or longer retirement.
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Confirming the Productivity Commission’s conclusion that private sector superannuation members manage their superannuation payouts wisely, Mercer Consulting has attributed the $7 billion blowout in unfunded liabilities of the two major federal defined benefit funds to similarly sensible behaviour by members.
Whilst bad news for taxpayers, this large blowout in future costs over only three years is excellent news for members of the Public Sector Superannuation Scheme and the Commonwealth Superannuation Scheme who are taking maximum advantage of their super arrangements.
Both these funds were designed using mortality factors from the 1920s on the assumption that many members would be keen to cash out their super as a lump sum and not take a pension. As a result, several decades of Telstra, Qantas and government employees who opted for lump sums missed out on the generous and secure pensions available from preserving their benefits until retirement.
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Given the uncertainties surrounding government policies and future investment returns, there’s understandable confusion concerning the best financial planning options.
Historically low interest rates have taken much of the pressure off paying off the home mortgage quickly. But after-tax returns from paying off a mortgage of around 4 percent or slightly more a year compare favourably with the returns on comparable safe investments.
Term deposits in personal names are yielding after-tax returns of 2 percent or even less for investors on higher marginal tax rates.
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