The case for tinkering with superannuation

Geoff Wilbow explains why the current superannuation contribution caps are counterproductive and inefficient.

The attitude of most people working in financial services is: ‘Please stop making changes to superannuation — enough is enough.’ Yet Governments don’t seem to be able to resist forever tinkering with the system.

So it is reluctantly that I take this opportunity to rail against the current super contribution caps. I think the current rules are counterproductive and inefficient. Changes should be made.

We are all aware the super rules are complex because they have been added to, changed and amended so many times by politicians and bureaucrats over many years. Super in 2011 only vaguely resembles what it was decades ago.

It was a retirement scheme for public servants, senior executives and a few privileged managers. It changed its spots in a major way with the accords in the 1980s. New rules and tax requirements became the norm.

Nowadays I like to explain superannuation simply as another investment structure (companies, partnerships, trusts and individuals being some others).

Like any structure in which to hold investments, superannuation has its own laws and regulations.

These include all the preservation rules, some limitations on the assets that can be held, and superannuation’s own tax regime.

It is a very important structure for most Australians, and unlike other investment structures it has a prime focus — providing retirement income — but, as we all know, superannuation is used for other purposes.

Contribution caps

Government wants us all to fund our own retirement if possible, rather than relying on the social security safety net.

Hence, the relatively benign tax rates of accumulation phase super, the tax-free income and capital gain on investments in the pension phase, and of course the coup de grâce of the Howard/Costello days: tax free withdrawals over the age of 60.

You might think, like Mae West, that ‘too much of a good thing is wonderful’ but politicians don’t always see it that way. I understand their concern, having seen a retired acquaintance, before May 2006 at age 55, ‘dump’ $54 million into super as an undeducted contribution then immediately turn it into an Allocated Pension.

It was pointed out to her that under the rules of the day she would need to draw an annual pension of over $2.56 million a year.

What would she do with that cash flow? Well for the next 10 years most of it was to be contributed back into super.

This was not, of course, an example of using the superannuation structure for its intended purpose; rather, a very wealthy woman using the structure to minimise tax.

The current annual contribution caps ($50,000 of concessional if over 50 reducing to $25,000 in 2012-2013 plus $150,000 non-concessional) have certainly interfered with this strategy, and a rethink was required.

Non-concessional contributions

So on the non-concessional side, why not a simple life time limit per person of (say, for example) $3 million indexed for inflation? Most people in our community will not have a spare $3 million in a lifetime and will have to settle for less (often much less), but of course many will and therefore can fund a very good retirement lifestyle.

But we didn’t get simple limit — we got a $150,000 non-concessional per year with the possibility of $450,000 now, but no more for three years. To get a $3 million non-concessional contribution into super will take 17-20 years.

Even for people with significant assets — let alone your average working family the Government keeps referring to — non-concessional contributions of any significance 20 years (or even 15 or 10 years) before retirement is not realistic.

There are families to raise and educate, home mortgages to pay and lives to be lived.

If one does end up with a significant lump sum closer to retirement say at 63 years of age (from the sale of investment property, downsizing the home, inheritance or the elusive lotto win) why not let people put a generous contribution into super at that point?

Not an unlimited amount, but a top up to the life time limit of $3 million (or less in most cases).

Let people contribute money when they have it, using the superannuation system for its intended purpose: to generate retirement income.

At the moment, if a person is 65 when they receive a large windfall, then it is ‘go and find 40 hours of work in 30 days each year’ to get non-concessional money into super (do it each year for the next nine years and put in $1.5 million plus a bit for indexation).

What a farce. If you wanted to design a more complex set of rules to arbitrarily disadvantage some people in similar circumstances to others, you could — but it would be hard.

So why have an upper age limit (together with some arbitrary work test) on super contributions? If someone comes into a lump sum of money at age 84 why not let them put it into super?

Sure they will get some tax benefit, but after all it will be a benefit for 20 years less than if they had contributed the money at age 64.

Concessional contributions

Then we come to concessional contributions. I don’t have the energy or space to go through the whole gamut on this one.

But how about all employees receive the super guarantee then have a lifetime limit to which they can top up concessional contributions by salary sacrifice or for the self-employed, personal concessional contributions?

Limit the total by all means, but let people salary sacrifice at a time in their working life when they can afford it (usually toward the end of a working life).

A person who has a high paying job early in life and has a family later in life for example should be able to choose to contribute early.

Probably even more common would be for the successful self-employed person to be able to make contributions later in life after the business is established.

The current super contribution rules are discriminatory, inflexible and do not help people use superannuation to generate tax-effective retirement cash flow.

Geoff Wilbow is a financial adviser at Fiducian Financial Services.