Like a lot of people, I suspect, I’ve been putting off the task of working out my situation in relation to superannuation. The rules are so complex, and have been changed so often, that it seems easier to just keep making the automatic payments, pick a reasonable looking investment strategy from the four or five on offer and hope that something comes along to clarify the issues.
In one sense at least, that strategy has paid off. Costello’s Budget speech announced what are claimed to be the most radical reforms ever to superannuation policy. At the very least, they are big changes, and render most previous calculations obsolete, so I’m glad I didn’t make any. Moreover, Costello’s claim to have simplified the tax treatment of super appears to be correct, although we’ll have to wait for the devilish details of cliche to be sure. Given that complexity entails a wide range of social costs, simplification is good in itself.
The bad is that the simplification has been achieved by greatly reducing the tax paid by those with large amounts of super, while doing nothing much for the rest. The likely outcome, I suspect is an increase in import-intensive luxury consumption.
The cosmetic part of the story is the claim that this will encourage people to stay in the workforce longer. Like a lot of other commentators, I doubt this. The income effect (more money makes retirement more affordable) seems likely to outweigh any substitution effect from higher expected net returns.
John Quiggin 
Don’t you have to stay in the workforce until you’re 60 to get the benefits though? So to the extent that there is an income effect people will be working longer (if they were looking to retire before 60).
Also I wouldn’t be so quick to get out the calculator. No doubt they’ll change the rules again before we retire. Personally, I think there is a lot of soverign risk here. The no tax on super will look too juicy for future governments, struggling with the costs of an ageing population, to keep their hands off.
This policy is madness.
It means that Super tax is front loaded now when we don’t need the revenue and dries up in 20-30 years time when the Government desperately needs it.
Cutting contributions tax and simply allowing retirees to pay income tax solves everything.
No lump sums, no RBLs, Super becomes the tax efficient investment vehicle well ahead of negatively geared property as it should be, investment goes into productive parts of the economy.
Stupid Libs. Whenever anybody traipsed the Parliamentary halls to talk about Retirement Incomes all the Libs ever wanted to do was destroy Industry funds.
Like a lot of other commentators you seem to think that working more is a type of economic virtue. The point of economic advancements is to make work less necessary. If more people can afford to knock off work and retire earlier then thats a good thing.
If tax cuts give people the means to work less then thats great. And if tax cuts mean people feel rewarded for working more then thats also great.
isn’t the real story here that high to middle income earners will now be saving a lot more and not purchasing expensive imported goods?
“Like a lot of other commentators you seem to think that working more is a type of economic virtue.'”
The relevant point is that Costello believes this.
Homer – you are probably aware that we generally agree on the issues you have raised. However, your quote about the Libs and industry funds is wrong. I’m not going to get into the details of it but while the Industry funds and there PR campaign are misleading to the public, the Libs don’t understand the issues. If they did, the Industry Funds would be brought to account for their misleaing PR and the way they report both their costs and returns.
Razor,
This is what I got from ‘talking’ to government people from 98-01.
don’t get me wrong I am not pro-Industry fund perse but all the libs wanted to do was to tear them down.
They may have changed from those halcyon days of course.
I cant see how a future government, pandering to an electorate full of boomers living tax free, would have the nuts to re-introduce taxation of benefits for the over 60’s.
As pointed out, this will benefit the more financial- most importantly the abolition of RBLs- and as referred to by our host as the complexity of super industry legislation has left many with little or inadequate super for retirement. This has the result of only a small pot at retirement which, when the tax-free post 83 is recontributed as an undeducted contribution leaves not a lot of tax left for peter.
I am like you John I don’t think about it much and basically implement your approach. But do you reduce your planned savings? Its hard not to.
Superannuation is complicated irrespective of regulations.
“The point of economic advancements is to make work less necessary. If more people can afford to knock off work and retire earlier then thats a good thing.”
Think about how many people work who don’t actually have to work for financial reasons. While some people want to retire as soon as possible, many people don’t want to leave the workforce at all. Either because they like what they do or they have nothing else they’d rather be doing and don’t want to be sitting at home.
I think the point of economic advancement is to make work more rewarding from some standpoint, not less necessary.
Avaroo,
I think you are right that there are factors beyond the financial that leads people to work (eg Bill Gates still goes to work) .
However I stand by my point about economic advancement.
John Quiggin
If you were not implying that “working more is a type of economic virtue” then I apologise for the first sentence in that post, and stand by the rest of it.
Regards,
Terje.
Bring Back EP at LP wrote:
“This policy is madness. It means that super tax is front loaded now when we don’t need the revenue and dries up in 20-30 years time when . . . [it will be] desperately need[ed] . . . Stupid Libs . . . all [they] ever wanted to do was destroy Industry funds”.
I agree with EP, re the new rules being financially irresponsible. Not sure about destroying Industry funds being a big motivator, though; turning the screws, even more, on my generation appears to be the main desired outcome.
“However I stand by my point about economic advancement.”
Even recognizing that the most economically advanced people are often those who choose to work when they do not have to? I find it hard to view the purpose of economic advancement as making work less necessary when you factor this in. If the richest people were the first ones to quit after becoming wealthy, your point would make sense.
“Don’t you have to stay in the workforce until you’re 60 to get the benefits though?”
Not that I’m aware of. You could for example retire at 55 and start an allocated pension under the existing rules (tax-free allocated pension fund with 15% rebate on your taxable allocated pension up to the RBL) and then when you turn 60 the allocated pension become tax-free income. i.e. you then have a completely tax-free investment – no tax on the fund and no tax on your allocated pension.
The interesting thing is say you have $75,000 p.a. other income (dividends etc.), then you can put $50,000 p.a. into a super fund, paying only 15% contributions tax, and then just take the net amount ($42,500) straight out again if you want to, thus paying a top marginal tax rate 16.5% even though your pre-contribution income is $75,000. i.e. a net cash income of $64,875 from a pre-contribution income is $75,000. And this is without any additional tax-free withdrawals from the super fund which now has no reasonable benefit limit. As far as I know, we’ll be allowed to do this up to age 75.
The removal of the reasonable benefit limits also means it’s very worthwhile contributing $50,000 p.a. over many years if you’re rich enough (and your employer agrees if you’re an employee), thus making multi-million dollar super amounts possible and tax-efficient. It is then possible to have a multi-million dollar tax-free allocated pension fund paying someone whatever tax-free allocated pension such a fund could produce – hundreds of thousands a year or whatever. If you’re rich, you should be salivating. Imagine, no matter how rich you are, you pay the same tax rate on every part of the super process as everyone else.
“This policy is madness.
It means that Super tax is front loaded now when we don’t need the revenue and dries up in 20-30 years time when the Government desperately needs it.”
When you see governments adopt this taxation strategy you wonder whether they either don’t care what happens in the future or if they don’t believe their own rhetoric about not having enough workers in the future to pay all the taxes.
“Cutting contributions tax and simply allowing retirees to pay income tax solves everything.”
Paul Keating should have been happy to just get the franking credits from super funds in 1988 instead of his 15% contributions grab-for-cash. He created a monster that’s now practically impossible to kill.
“As far as I know, we’ll be allowed to do this up to age 75.”
I should have mentioned that this (making contributions) applies after 65 if you pass the work test (40 hours of work in 30 consequtive days of the applicable financial year). It applies below 65 with or without working.
Well, my financial “advisor” (merchant banker) says that Australia has now moved from worlds worst super to worlds best.
Where the libs differ from labo(u)r is that the ALP seek to impose super contributions onto employers whereas the libs have increased the incentives for employees to invest in their future.
“This policy is madness.
It means that Super tax is front loaded now when we don’t need the revenue and dries up in 20-30 years time when the Government desperately needs it.”
In 20-30 years time retirees will be less dependent on welfare whilst contributing to the economy as consumers.
Knock on effects will include GST from consumables, ability to continue private health insurance and resources for old age care.
What is so mad about that?
I am grateful that they’ve simplified the tax treatment on exit, and I’m tempted to start contributing $50,000 per annum immediately. 25 years at $50K per annum and 5%-7% real rates of return will yield a very comfortable retirement. Super is now a very tax-advantaged way to save.
However, chances are that once the boomers have all got their super tax free, and the government coffers are wiped clean paying for their aging healthcare, the feds will simply reintroduce exit taxes to bolster revenue.
How can I be confident this policy is not just the fiscal equivalent of a sucker-punch?
It is a notorious fact that superannuation policy-making over the last 25 years has resembled a rapidly rotating revolving door.
Policy makers have rushed giddily between contradictory priorities: self-sufficiency of retirees, envy (RBLs), enforced financial responsibility (penalties and prohibitions on taking lump sums), corporatism (industry funds and legislated employer contribution minima).
With each change the commentariat have assumed that they were analysing the culminating major change in the system. This has never been the case. And I doubt that Costello’s changes are the last word either.
The abolition of RBLs are likely to revivify the green-eyed monster.
Lump sum pay outs will enable a return to the profligate Big Spend and greater reliance on the DSS pension.
And looming above it all is the temptation of government to find a way to tax some of the torrent of money that will be locked up in super accounts. This money is a big, fat sitting target.
So the question is how long will Costello’s era of liberality to the aspiring superannuant last? My guess is about five years.
All you Gen Xers out there who are now calculating how Costello’s reforms may work for you in 15 to 20 years should be cautious and sceptical. After all, a lot of Boomers are likely to piss their lump sums up against the wall and rely on you to fund their pensions.
Dogz, I see we agree on something.
The Liberals’ super choice legislation was aimed squarely at the industry funds (falsely thought of in their eyes as union funds), in the mistaken belief that if people who are in the industry funds were given a choice, they would desert those funds and head to the bank an insurance company funds.
It is ironic indeed that, with super choice, the industry funds are now attracting funds from people who weren’t previously able to join them, while keeping their existing members. The bank and insurance company funds, not to mention to the financial advice industry, have only themselves to blame for this. The only substantial difference between the industry funds and the funds is the other funds charge whopping entry fees, exist fees, fees along the way, trailing commission fees, you name it. The industry funds charge much, much less, and their funds managers are just as good.
Why wouldn’t you put your super into an industry fund, if you had the chance?
Uncle Milton asked – “Why wouldn’t you put your super into an industry fund, if you had the chance?”
Because you generally don’t get any advice. And acting on the general ruleof thumb that advice is only worth what you paid for it, the advice that is given out with industry funds isn’t necessarily the best advice money can buy.
You may also be seeking investment out-performance and investment in specific sectors or products, or you may actually want real-time visibility of what your money is actually invested in down to the specific security level. You may also want to be able to seee where every single dollar is spent on fees, charges nd taxes and see every dollar of franking credit that you are entitled too coming back into your own fund, not a general pool. You may also be pissed off about paying CGT within a fund that isn’t necessarily related to profit taking on your own money. I could go on and on, but there are plenty of good reasons why you wouldn’t invest in an Industry Fund.
If you want to by a Ford or Holden, feel free to go into an Industry Fund. If you want a Mercedes or a Porsche you need to look elsewhere.
“Because you generally don’t get any advice”
A few years ago I took advice from a financial advisor who was an agent for one of the big financial services industries companies.
He advised me to put part of my super into a certain equities fund. I took this advice and a year later checked on the performance of this fund. It was ranked 188 out of 188 funds in its class.
Sometimes, you are better off without advice.
So what UM, were you retriring 1 year after putting in to the super?
A lot of funds went into shortr term reverse but averaged out positive over the years, plus the tax deduction.
AMP went belly up one year, look at them now.
Be more positive.
Rog, if it all averages out over the long term anyway, that’s even more reason not to pay for advice.
Uncle Milton – there are lots of different sots of advice – investment advice (tactical and strategic), overall strategy advice, specific areas.
In your case of one fund – if the adviser told you to put it all into only one fund then the first rule of diversifying has been breached – reasonable grounds for a complaint seeking compensation!!
Razor, he didn’t tell me to put it all in one fund. It was only about 15% of my portfolio.
He’s given me all the types of advice you mention and I’ve found this advice to be pretty useless.
Rog says:
So which was the year they went belly up?
Was it 2001, where they hit $14.93, but ended the year at $12.89?
How about 2002, where they opened at $12.80, and ended at $7.84
2003 maybe? Started at $7.97, ended at $4.73? Hitting $3.38 on the way?
But hey, look at them now! $9.60! They only have to go up another 55% and they’ll be back to where they were 5 years ago!
Sheesh.
SJ – I get an electrician to fix my electrics and a plumber to fix my plumbing. If you want to be an investment adviser, instead of paying one, that’s your call – quit whinging.
“In 20-30 years time”
the wealthy
“retirees will be less dependent on welfare”
The retirees who benefit from these superannuation tax changes would be very unlikely to be getting welfare anyway.
“And acting on the general ruleof thumb that advice is only worth what you paid for it”
The rule should be that advice is only worth what you paid for it, at best. If you pay for advice, good luck.