What the superannuation reforms mean for older workers
The Government recently announced that a Superannuation Roundtable will be established to consider retirement options based on ideas raised at last year’s Tax Forum and the ‘Stronger, Fairer, Simpler’ package of tax reforms.
Topics for discussion include the types of income streams offered through superannuation (such as annuities and deferred annuities), the concessional contribution limit for individuals aged 50 or older, the super guarantee (SG) age and rate, and the low income super rebate.
According to the Australian Bureau of Statistics (ABS), 41 per cent of Australians aged 45 or older intend to transition to part-time work before they retire, however, 13 per cent of older workers intend to work for as long as they are able.
Out of those people that do intend to retire, 36 per cent stated that financial security was the main factor that determined their retirement age.
About 50 per cent of these people expect superannuation to be their main source of income at retirement, while 26 per cent expect the age pension to be theirs.
These percentages differ for individuals currently in retirement, with only 17 per cent relying on superannuation and a large proportion (66 per cent) relying on the age pension as their main source of income.
The proposed changes
Retirement savings for older workers may increase due to the SG age and rate changes. In addition, some older workers may reduce work hours and salary, therefore becoming entitled to the low income super rebate and co-contribution.
Other individuals who are continuing to work full-time may need to utilise the higher concessional contribution limit.
Under the proposed measures, retirement savings may increase overall. However, potential age pension entitlements may reduce.
This is in line with the Government’s general view that personal assets should be run down before income support is provided.
Case study 1 – low income older worker
Sebastian, age 55, is a single homeowner with few assets. His superannuation balance is $100,000 (invested in a balanced portfolio) and he contributes $500 of after-tax contributions per year.
His only other assets are personal assets worth $20,000 and $30,000 in the bank. Sebastian works three days a week and his salary is $35,000 gross per annum. His intention is to work for as long as he can – he believes he can work until age 75.
Upon attaining age pension age (age 67), he will commence an account-based pension and draw the minimum pension each year.
He will be entitled to receive the low income superannuation rebate and some co-contribution. However, the co-contribution amount payable will differ under the current and proposed rules.
Graph 1 and Graph 2 illustrate the effect of the proposed measures on Sebastian's retirement savings and age pension entitlements (today's dollars).
Sebastian’s retirement savings will increase by more than $30,000 (today’s dollars) at retirement age (age 75) and $22,000 at life expectancy (age 85) under the proposed changes.
This is due to a larger amount of mandatory employer contributions and low income superannuation rebate (although total co-contribution decreases).
However, as retirement savings have increased, cumulative age pension benefits decrease by over $12,000 (from age 67 to 85), creating a net benefit of just over $10,000 (today’s dollars) at age 85. Therefore, under the proposed rules, Sebastian is slightly better off.
Case study 2 – mid-high income older worker
Duncan, age 55, is a married homeowner who wishes to continue to work full-time until age 75. He has a salary of $80,000 per annum and $250,000 in superannuation (invested in a balanced portfolio).
He would like to salary sacrifice $40,000 pa into superannuation, but only if he can do so without exceeding the concessional contribution limit.
His aim is to maximise the amount of contributions he makes into superannuation each year (within his budget), without incurring excess contributions tax.
Duncan and his wife Penelope (age 55) have joint personal assets of $50,000 and $60,000 in the bank. Penelope has never worked and therefore does not have any superannuation.
Graph 3 and Graph 4 illustrate the effect of the proposed measures on Duncan and Penelope's retirement savings and age pension entitlements (today's dollars).
Under the proposed changes, Duncan’s retirement savings will increase by more than $82,000 (today's dollars) at retirement age and nearly $80,000 (today's dollars) at life expectancy.
This is due to an increase in mandatory employer contributions and the ability to contribute larger amounts under the concessional contribution limit without incurring excess contributions tax.
The increase in retirement savings is partially offset by a reduction in cumulative age pension entitlements (from age 67 to 85) of over $59,000, resulting in a net benefit of over $20,000 at life expectancy (today's dollars).
Therefore, Duncan and Penelope are better off under the proposed rules.
Note that Duncan has not commenced a transition to retirement and salary sacrifice strategy. If he did, this may increase retirement savings even further.
However, the purpose of this case study is to illustrate the impact of announced legislative changes.
Summary
If all announced changes come into effect, some individuals may receive a higher net benefit even after decreases in age pension entitlements are taken into account.
However, the superannuation landscape may change again as the current tax concessions within super will be reviewed by the Superannuation Roundtable.
Therefore, any benefits under the proposed measures may be offset by additional changes to the current superan concessions.
Rachel Leong is the technical services manager, direct distribution at Suncorp Life.
*Graph 1 Assumptions: Maximum low income super rebate, lower threshold and maximum payment for the co-contribution are not indexed. Salary, after-tax contributions and concessional contribution limits are indexed at 3% per annum. Contributions, deduction of tax and pension drawdown occurs at the end of the year. Earnings are calculated after all contributions, deductions and pension drawdowns have occured. All contributions cease after age 75 (retirement age). Super is converted to an account-based pension at age pension age and every subsequent year. No commutations are taken from the pension. Normal minimum pension drawdowns occur (reduced minimum does not apply). Centrelink rates/thresholds are at 1 January 2012 (indexed). Centrelink assets and income test lower thresholds are indexed at 3% per annum. Super investment is in a balanced portfolio with a gross return of 7% per annum. Net rate of return on cash is 3%. Value of personal assets remains at $20,000. Life expectancy for projection purposes is age 85.
* Graph 2 Assumptions: Super balance threshold for the higher concessional contribution limit remains at $500,000 (not indexed). Salary sacrifice after-tax contributions and concessional contribution limits are indexed at 3% per annum. Contributions, deduction of tax and pension drawdown occurs at the end of the year. Earnings are calculated after all contributions, deductions and pension drawdowns have occurred. Refund of excess concessional contributions (up to $10,000) does not apply. All contributions cease after age 75 (retirement age). Super is converted to an account-based pension at age pension age and every subsequent year. No commutations are taken from the pension. Normal minimum pension drawdowns occur (reduced minimum does not apply). Centrelink rates/thresholds are as at 1 January 2012 (indexed). Centrelink assets and income test lower thresholds are indexed at 3% per annum. Super investment is in a balanced portfolio with a gross return of 7% per annum. Net rate of return on cash is 3%. Value of personal assets remain at $50,000. Life expectancy for projection purposes is age 85.
AUTHOR
Staff Writer
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