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Why super caps actually make sense

The Federal Government’s sales job on its retirement income changes should have focused on one key point – the actual purpose of superannuation, writes Andrea Michaels.

Nov 23, 2016, updated Nov 23, 2016
Superannuation isn't a wealth management tool.

Superannuation isn't a wealth management tool.

Now that the morbid fascination with American politics is fading, weekend editorials can return to their favourite occupation: gnashing teeth over the raft of changes affecting future retirement planning, with Scott Morrison’s new superannuation amendments due to roll out from July 1.

As South Australia has one of the oldest populations in the country and high number of hard working small business owners and SMSF trustees – these headlines are likely to alarm many locals of a certain age.

But it strikes me there wouldn’t be so much confusion and angst if the reasoning for these changes had been explained a little better to those looking to retire in the next 10-15 years.

What really needs to be spelled out to those who are listening is the very purpose of superannuation.

Super is not wealth management

Here’s the important bit: super is there to fund retirement. Not holidays on the Riviera, or leaving the kids a fancy ‘shack’, or a share portfolio. Nor handing down a low/no-tax inheritance to future generations either. In this sense superannuation is not, as many believe, a wealth management tool.

The 2014 financial system inquiry recommended that we write down the definition, just to remind ourselves. And, at last, the government now intends to legislate the purpose of superannuation as “to provide income in retirement to substitute or supplement the age pension”.

I think most people agree that a total of $1.6 million in tax-free super is a pretty generous amount to retire on – even if we’re living to 100. So why would anyone need more? Perhaps if you want to hold assets on a tax-free or low-tax basis to pass on to children when you die. But that has nothing to do with funding your twilight years.

Superannuation has been a nifty way to hold funds while paying minimal or even no tax, rather than the higher marginal rates of personal income tax. And that has been done for a good reason – to encourage saving for retirement. But the way it works now, when you die, you can pass on a healthy fortune on a tax-free basis — and without having paid much tax on that money along the way.

No more tax-free intergenerational wealth transfer

If the government had called a spade a spade, they might have named all these ‘scary’ new changes as an ‘inheritance tax’ of a kind. But the very thought of those words would outrage most Australians – despite the fact most countries in the world have some form of it in play. So they’ve kept quiet and skirted around the issue.

But if stopping the tax-free transfer of wealth to the next generation is actually the very purpose of many of these changes, why didn’t they just say so? Then we’d understand.

The government just needed to tell us exactly why the changes were made. Instead the complexity and constant change has spooked many who are wondering if their nest egg is safe, or if putting extra into super is a good idea. And the last thing we can afford to do is scare the average Joe or Jane from saving for their own retirement.

Let’s be clear. The cap on tax-free pension accounts (including in SMSFs) is aimed at the very top end of the market, and that’s only about 1% of super members. After all, the average Australian earns just over $70,000 a year, so this is unlikely to be a problem for most.

Plus, this cap on the amount you can transfer to pension-mode (which will be tax free) is for each individual, so some lucky couples could actually amass about $3.2 million in a tax-free environment. And beyond that, the 15% taxed environment that will continue to have no cap (accumulation account) is not a bad tax problem to have.

If you need more than that, then by all means amass a fortune in additional investments and pay the full amount of tax on them like everyone else. At least, that’s what the government is trying to say.

Flexible super options remain

The other 99% of the population shouldn’t be alarmed because if your most vexing problem is shooting over the $1.6 million pension account cap, then life must be OK.

A lot of us are just worrying about how to pay the bills and feed the cat when we finally stop working.

So I think we should leave the gnashing of teeth to the super wealthy who will now be looking for their tax advantages elsewhere. The rest of us should just continue saving for retirement despite the sensationalist headlines.

And here’s hoping next time the government will learn how to keep it simple when constructing messages around retirement planning issues.

Andrea Michaels is specialist in tax and succession planning and is the managing director of South Australian commercial law firm NDA Law.

 

 

 

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