It’s time to talk about the future of superannuation

With eight years having passed since the ‘Simpler Super’ review, it could be time to reopen a dialogue about the future of super, Bryan Ashenden writes.

It might sound double-Dutch to some, but for many people the world of superannuation seems like a lost language. Hard to understand and difficult to learn, it poses questions about why it is important in today’s world? 

Charged with the responsibility to help our clients navigate their way through legislative complexity and uncertainty, understanding the ever-changing nature of superannuation is extremely important.  

As we approach this year’s Federal Budget, consider that it will mark the eight-year anniversary of the last significant change to super – the introduction of the Simpler Super regime. 

Including the removal of reasonable benefit limits, penalties for excess contributions and tax-free withdrawals from age 60, legislative change to give effect to Simpler Super was complex and took time – perhaps why it was soon thereafter renamed to be Better Super.

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Ultimately we then ended up with the Cooper Review and the Stronger Super reforms, which are still being implemented today. 

Another review of super? 

Given it has been eight years since the last significant change to superannuation, when will it happen again? Certainly, the new Government is on record as committing to no unexpected negative changes to the superannuation system during its first term in Government. 

A cynical view may say that as long as we have enough notice, then nothing could be regarded as unexpected – but any stability for a period of time should be applauded.  

However, this doesn’t mean that change won’t come into the future, or that discussion on that change won’t start happening now. 

Consider the Financial System Inquiry that is currently underway. There have been many calls for the financial planning industry to be excluded from this review in view of the inquiries, reviews, consultations etc that ultimately led to the introduction of the Future of Financial Advice (FOFA) reforms. 

To date, the Government has not accommodated these pleas, and realistically, you have to consider if excluding financial planning would be the right thing. 

Certainly, we need to have a period of stability – for our clients, the industry and for ourselves. But if you were to conduct a review of the entire system, you couldn’t do this or make appropriate recommendations if you start to exclude certain segments.

And certainly the terms of reference for this inquiry covers areas, such as superannuation, that are fundamental to presentation of quality advice outcomes for our clients.   

In addition, the Government announced that it would commission a Tax White Paper for delivery during its first term.

This paper would examine the current taxation regime in place and provide recommendations for possible future reform across all forms of taxation.

This could certainly include a review of the taxation regime within superannuation, the franking credit regime and individual taxation rates and thresholds. 

Both of these papers or reviews have arisen at a time when there have been many pre-Budget submissions made to the Government. Who knows exactly what we will see on 13 May when the Coalition delivers its first Federal Budget in seven years, but certainly there have been many calls for change, some of which have been consistent, from industry bodies. 

What does the Budget have in store for us? 

The wish list 

As per usual, there is the call for making financial advice deductible. Whilst there would be no argument from many that such a change would benefit clients by making advice more affordable, there have already been indications that such a change will not be made this year. 

There have been calls for a raising of the superannuation contribution caps. However, I would think it extremely unlikely that this would occur in the Budget this year for a number of reasons. 

First, back on 5 April 2013 the previous Labor Government announced an increase in the concessional contribution cap to $35,000 for those 60 and over from 1 July 2013 and this then been extended to those 50 and over from 1 July 2014. This has subsequently been passed into law, and was not opposed by the Coalition at the time. 

Add to this the fact that we have recently had the announcement that the contribution caps will index from 1 July 2014 for everyone eligible to contribute to super.

The standard concessional cap (applicable to those under age 50) will increase to $30,000. The non-concessional cap by consequence increases from $150,000 to $180,000.  

From 1 July 2014, this means usage of the bring-forward (or averaging) rule can allow a person to contribute up to $540,000 into super as a single lump sum – a $90,000 increase on today’s limits.  

With “no unexpected changes” to come and an already legislated increase (by indexation) of the caps from 1 July 2014, it is highly unlikely we will see an increase or decrease in the caps announced during the course of this year’s Federal Budget. 

The probable or possible list 

Two areas that have come up for consideration however relate to social security payments and superannuation preservation rules. 

For the last few years there have been what may be regarded as “minor” tweaks to the social security system. However, there is plenty of discussion (some of it fuelled by comments from the Government) that we may see more significant changes announced this year. 

One of these revolves around the indexation of social security payments being inconsistent: many reports have highlighted a significant jump in the number of people seeking Disability Support Pension payments, due to it paying at a higher level than the Newstart Allowance.

With different indexation in place, that gap continues to widen, so there has been some speculation that this will be addressed, so as to remove any “incentive” to try and qualify for one form of payment over another. 

The other significant change which has been mooted, and has been raised for consideration and speculation a number of times in previous years, is a complete overhaul of the asset and income test qualification rules for the age pension. 

For many, it still defies belief how someone can have assets in excess of $1,000,000 yet qualify for Government-funded support payments. Is this fair?

Does this reduce the amount of Government funding that may otherwise be available for those who don’t have a significant level of assets set aside for retirement? 

There are always two sides of an argument, and some may question whether there should be different allowances based on where you live as the cost of living differs significantly across the country.

If COLA (“cost of living away”) allowances are made available for AFL footballers living in Sydney (as an example), when many are already paid well above the average wage level, why should it no also apply for retirees who may have less options available to them? 

Whatever your view on this piece, it certainly wouldn’t be a surprise if at some stage during the Government’s first term we did see some movement in this space. 

The other scenario that has been raised by a number of industry bodies is the possibility of increasing the superannuation preservation age from what will currently be age 60 to age 62, so as to keep it five years below the age pension age (which will gradually move from age 65 to 67. 

One of the rationales behind this is to aid in providing an incentive for people to remain employed in the workforce for a longer period of time.

In addition, if preservation age remains at age 60, then clients may be reliant on their own savings for a longer period (ie, up to seven years) before qualifying for the age pension.

This could lead to an outcome (one that is not unrealistic) that these retirees will have significantly smaller asset balances upon qualifying for the age pension and, in the absence of any other reform, could therefore be eligible for a higher payment and be reliant on those payments for a longer period of time. 

Again, this would place a heavier reliance on the Government purse in the longer term, and future Governments would need to consider how this will be funded. 

A case for even more reform? 

If preservation age did rise to age 62, is it enough?  First of all, in its own right it probably would lead to other legislative change, such as a need to change the age at which superannuation payments become tax free.

Under current legislation, this occurs at age 60 – it is not tied to a preservation age. So allowing tax free super payments from age 60, when possibly you couldn’t access until age 62 seems nonsensical. 

Currently, it would seem that both sides of Parliament are committed to retaining the tax-free status of super.

Certainly, it would be politically damaging to start taxing these payments again. However, I don’t think this should prevent a discussion about what changes should be made. 

For arguments sake, would we ultimately be better off by aligning the tax-free treatment of superannuation payments to the age pension qualification age (eg, age 67)?

Below age pension age, any withdrawals could be taxed, but perhaps do this by applying the concessional tax regime that currently applies between preservation age and age 60.  

For example, pension payments could qualify for a 15 per cent tax offset until age pension age, and a portion of lump sum payments could be tax free, with concessional rates above this. 

Would such changes help to reduce the possibility that people will withdraw all (or a substantial portion) of their super tax free prior to age pension age, put it into their primary residence (currently not assessable for age pension purposes) and then seek the age pension? 

Whilst this may seem to be a disincentive to some, particular younger generations who would view the rules as consistently changing and having to wait even longer before they can access their super and then even longer before they can access it tax free, perhaps some other issues can be addressed at the same time. 

There have often been calls for giving people the ability to access some of their super to use as a deposit towards a home deposit.  

Perhaps a legislative change can be made to allow this at the time the above changes are made, but limit the amount that can be accessed to the level of the low rate threshold (currently the $180,000 level that can be withdrawn tax free between preservation age and age 60).

Any such withdrawals would then reduce the level of that cap available when these people reach their preservation age. 

Where to from here? 

Right now, we are facing two significant Government-initiated reviews that could, in the future, have the potential to again radically change the face of superannuation. Importantly this doesn’t mean it will be for the worse. It may be different, but it may also be better and / or fairer. 

The Financial System Inquiry is due to report back to the Government with a series of recommendations by the end of this year.

The Tax White Paper recommendations aren’t expected until closer to the end of the current Parliamentary term (so possibly 2016). And in either case, they are only recommendations and the current (or future) Governments can choose to implement them or not. 

We still have the right and duty to ensure we help our clients navigate this complex world of legislation and regulation and to get advice that is in their best interest, and we need to do this in the context of the rules as they stand today. 

But with two reviews kicking off, isn’t it the right time to start a discussion about what the future could look like so we have a system that operates in the best interests of our clients, as well as in the best interests of the nation? We have to move from Simplus (simple) to Melius (better) to Fortius (stronger) with superannuation. What’s next? 

Bryan Ashenden is a senior manager of technical consulting at BT Financial Group.