Older super savers ‘thrown to the wolves’

Australian Financial Review

17 August 2016

by Sam Henderson

Many believe a $25,000 pre-tax contribution cap is too restrictive and does not adequately encourage Australians to save more in retirement

A reader in his 50s with $700,000 in super has a good chance of hitting $1.6 billion by retirement age, writes Sam Henderson who answers your questions on super.

Q: I am in my mid-fifties with a super balance of $700,000, largely achieved by making use of the pre-budget annual non-concessional cap over the last few years since the mortgage and private school fees have finally been put behind us. I had a perfectly sound plan in place to achieve a healthy super balance in line with Rice Warner’s lucky 40-year-olds over the next 10 years, using a combination of concessional and non-concessional contributions. But with the new flat $25,000 annual cap on concessional contributions, and having already used up the proposed retrospective $500,000 non-concessional cap, how can I possibly now achieve my pre-budget plan or even anything close to it? Some 40-year-olds may indeed be crying wolf, but I feel that we 50-somethings are being thrown to them! David

A: David, you are correct but only assuming you receive no return on your money, which is unlikely. I thought I’d run a quick rudimentary spreadsheet on the numbers and you would need to attain a return of 6.5 per cent compounded per annum to attain a little over $1.6 million in 10 years. According to SuperRatings, the average return over the past five years has been around 5.5 per cent for a super fund so assuming you received this return, it may be estimated that you could end of achieving a retirement lump sum of a little south of $1.5 million. Depending on your risk profile, experience, knowledge and preparedness to borrow money, gearing might magnify the returns (and potentially losses) to attain a figure well in excess of $1.6 million.

Incidentally, despite requiring a little faith in the future and an assumption that no further detrimental changes to super will affect you (lets hope not!), I don’t think you will be too far from the mark.

For the record, I do agree with you that the $25,000 is too restrictive and does not adequately encourage Australians to save more in retirement. It is proposed that superannuants will be able to use non-utilised years of the $25,000 (essentially saving it up and making a lump sum of up to $125,000 and still be able to claim a tax deduction). It’s further proposed that they will be able to contribute to super over the age of 65 without having to meet the work test until 75. This will help those people needing to pump up their super using lump sum contributions from the sale of assets or an inheritance.

All of this is increasingly important in a lower interest rate environment when $1.6 million may not create the income stream it did when interest rates were at 7 per cent. I should also note how highly problematic it is attempting to navigate the advice process in this environment after the government has made such impactful announcements without any of them having seen the light of parliament yet.

Q: I am another who will be caught out by the proposed changes to the transition to retirement pension rules. I do not classify myself as wealthy and I did not use the pensions to avoid tax. I believe that I have used them as intended and am now almost completely retired. I would like the option of doing interesting work if it came my way but it looks like that will be denied. I am also annoyed that the government has misrepresented the Productivity Commission which actually suggested that more information is needed to see who used TTR pensions and for what purpose before changes were made. The government is applying collective punishment to all who used the TTR pensions. I am now 68 and hence am well above my preservation age. I have a term allocated pension and an allocated pension in a self-managed super fund. Is it true that if I fully retire before the end of this financial year, the earnings for these pensions will continue to be tax-free? If so, I feel that it is ironic that the government will force a highly educated and experienced person (Ph.D.) from the work force but will draw no additional tax revenue. Michael

A: Thanks for your question, Michael. Your answer is far simpler than you may imagine. Attaining age 65 (three years ago) is a full condition of release so you should be receiving a full account-based pension not a transition to retirement (TTR) pension. TTRs are only for people from preservation age (age 56 at the moment) to age 64. This should have been changed by your administrator or accountant when you turned 65. You really have very little to worry about given the changes.

Essentially, you may continue to work or you may retire but either way, your pension will remain tax-free and you may also retain an accumulation account for as long as you like although it may be prudent to have as much as possible in a pension phase.

The only caveat is if you have greater than $1.6 million in your individual account, although I doubt you’d have a TAP if you are in this situation and the proposals are yet to pass parliament.

These questions are answered without the full financial and lifestyle details of readers and must therefore be taken as general advice. We recommend you speak to a qualified financial adviser for complete and comprehensive advice.

Financial planner Sam Henderson is CEO of accounting, advice and funds management firm Henderson Maxwell (www.hendersonmaxwell.com.au). To submit a question, please email: superquestions@fairfaxmedia.com.au. Published questions will win a free copy of Sam’s book The One Page Financial Plan (Wrightbooks, RRP $29.95) – remember to include your mailing address in your email.
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