Super swiftie

The Government has pulled a swiftie on superannuation. In the May budget it proposed to increase tax on super by nearly $3 billion by 2020.  Labor sniped at some design features but offered no real opposition and proposed its own increases of a similar amount.

The only opposition came from me and some Liberal Party backbenchers, encouraged by thousands of older Australians. Our pressure led the Government to revise its proposals. The effect of these revisions will be to increase tax on super even further, raising more than $3 billion by 2020.

The Liberal backbenchers have declared the revised plan a great victory.  Let’s hope they realise their mistake, because with a few more ‘victories’ like that, everyone will be living on the pension in retirement.

The revised plan not only retains the cap of $1.6 million on funds in a pension account, in which earnings are tax free and no tax is paid on withdrawals, but makes it more difficult for anyone to reach that amount.

Those earning more than $250,000 in combined salary and super will now pay 30 per cent tax on their super contributions up to $25,000, while anyone making a contribution over $25,000 will see these contributions taxed at marginal tax rates. And in case you haven’t done the arithmetic, you’d need to contribute $25,000 every year for 64 years to reach $1.6 million.

The ban on lifetime post-tax contributions in excess of $500,000 has been dropped, replaced by a new ban on annual post-tax contributions in excess of $100,000, or $300,000 over three years for those under 65. Thus, anyone who comes into some money in excess of this, via an inheritance for example, will be unable to move it into super.

The plan to enable couples in their seventies to level their super accounts by allowing a husband to make contributions on his wife’s behalf is gone, as is the plan to allow non-salary superannuation contributions by people aged 65 to 74.  Retirees will continue to be prevented from downsizing their home to put more of their wealth into super.

The plan to reduce the tax on catch-up contributions by mothers and carers returning to the workforce has been deferred. The earliest you could see a benefit from this is three years from now.

And to top it all off, there will now be a ban on putting any post‑tax money into super once your total balance exceeds $1.6 million.  The previous plan was to allow such contributions but tax the earnings at 15 per cent, so people would continue to invest in their retirement.

The underlying problem is that, while a superannuation balance of $1.6 million might sound like a lot, it is not enough to retire on without the age pension. With low interest rates and the increased possibility of living for at least 30 years in retirement, $1.6 million might only buy an annuity starting at around $50,000, rising with inflation. 

You could therefore go into retirement eligible for the age pension, which currently cuts out at income levels over $50,000.  And even if you don’t start that way, you’ll become eligible for the age pension soon enough because the upper income limit for the age pension rises in line with wages growth, which is faster than inflation.

Unless interest rates increase substantially or we start dying earlier, a much higher super balance will be needed to ensure permanent ineligibility for the age pension. If there is no benefit in accumulating a super balance in excess of $1.6 million, there will be no incentive to become independent of the age pension.