28 June 2017
It sounds incredible, but the government is providing a carrot to encourage people to stop working once they reach their 60s or late 50s. And then when they reach 65 the government will provide an incentive to encourage them to rejoin the work force. This is, of course, absolutely bizarre and not what the politicians had in mind.
I emphasise that the incentives are not big enough to cause an enormous rush of people aged between 60 and 65 to leave the workforce and rejoin when they reach 65. But I know of a number of people with large superannuation balances aged in their 60s who are now planning to do just that — leave the workforce and return once they reach 65.
When governments play around with pensions and superannuation it can have unintended and potentially damaging consequences for the society.
The latest superannuation changes will come into effect on July 1 so they concentrate everyone’s mind. The superannuation changes have been extensive and, perhaps understandably, the Australian tax office communications with accounting firms has often been complex.
Many accountants have spent hours trying to work out what it all means to their clients’ individual situations.
A number are now telling their clients that the rules whereby a person has a current entitlement to go into ‘transition to retirement’ pension mode have been changed more extensively than first thought (these transition to pension mode age qualifications depend on birth dates and can apply to people in their late 50s but certainly apply when a person reaches 60).
Currently a person can ask their super fund to put their entitlement into transition to retirement pension mode and therefore they must pay a minimum tax-free pension. But there is no tax to the superannuation income. They can continue to work so their personal income comprises superannuation pension and work income. Under the new rules if you are aged, say 61, you can still go into transition to retirement pension mode and draw that pension from tax-free superannuation income. There is a $1.6 million limit to the assets that can be used as applies to all superannuation. BUT in most circumstances it is very dangerous to be employed and gain work income because then your superannuation income is taxed at 15 per cent. This represents a clear incentive not to work in the years leading up to aged 65.
Once you reach 65 you are able to allocate up to $1.6 million into a tax-free superannuation pension account and you are also able to work at the same time. The tax-free status of your $1.6 million is not affected by the fact that you are working. So over 65 there is a clear incentive to work.
For a lot of people who are aged between 60 and 65 (and often the late 50s) and who want to stop working, the fact that they can gain tax free superannuation income up to the asset limit $1.6 million limit by not working will be attractive. In simple terms: Don’t work and have tax free superannuation or alternatively work and pay the superannuation tax.
For people with relatively small sums in superannuation it really won’t be an issue but for those with larger sums it will certainly become an issue and will cause many to leave the workforce. Already accountants are looking at ways you might be able to gain some working arrangement and still be able to get a superannuation pension from tax-free funds.
I might add that people aged between 60 and 65 can still take money out of their superannuation in the pension mode fashion — the difference is that as long as they work they must pay the 15 per cent superannuation income tax.
I can understand why the Australian tax office has structured the superannuation this way. They want to gain as much revenue from the 15 per cent tax as possible. But we have created a very strange situation and one that is not good for the community. Unfortunately that’s the way of governments in these times.
An even better example of poor policy is the aged pension gymnastics where people who have found themselves with assets in the vicinity of $400,000 and $800,000 are rewarded at 7.8 per cent when they spend their savings. Newspapers are absolutely studded with cruise advertisements to help people to reduce their assets and gain increased aged pensions. I don’t think the superannuation situation will be as dramatic but it shows that in Canberra they don’t understand how important to society it is to have people working in their later years. If they give up work in their 60s it is highly likely they will not return at 65. And they are more likely to end up on the government pension.
The current rules were established because the politicians of the day understood how important longer working would be for society. Someone needs to explain to the people in Canberra what happens in the real superannuation and pension world.