Save more, get less: how the new super system discriminates

The Australian Business Review

26 November 2016

Tony Negline Wealth Columnist

There are two harsh realities of the new superannuation laws — first, they discourage those on average wages from saving and second, the way it works they will discriminate against a layer of investors who have saved more than others.

It should never be this way — no doubt it was never the express intention of the new regime — but this is how it has come to pass.

Let me use some case studies I have used before, but now are more relevant than ever. At their worst they clearly reveal the new discrimination now legally enshrined in the system

We will assume you’re in a relationship, that you’re both aged at least 65 and own your home without debt. Our main area of focus will be your super assets, which is your major investment. In all our case studies we will assume you want a super pension from a non-public sector super fund which will pay you 5 per cent income. All income is paid to you tax-free.

For the sake of simplicity, we will assume that this super pension started after December 2014, which means the account balance is deemed under Centrelink’s income test. Apart from your home and your super, you own $50,000 of personal use assets including your car. You have no other assets.

All of our examples will consider the assets test thresholds that will apply from January next year.

Case study 1

You have $1.6 million in super assets. In this case you will receive no age pension and therefore your income is $80,000 per annum.

Case study 2
You have $200,000 in super assets. Your super pension will pay you $10,000 and you will be eligible for the full age pension of $34,382 including the pension and energy supplements. Total income is therefore $44,382.

Case study 3
What happens if you have $500,000 in super assets? Well you receive total income of $45,732 — a part-age pension of $20,732 and $25,000 from their super pension.

Case study 4
What about $700,000 of super assets? You will receive a super pension of $35,000 and a part-age pension of $5132 which means their income is $40,132.

Case study 5
Finally, what about those without $1 million in super assets? You receive no age pension and need to live off all their super pension of $50,000.

What does all this mean? You can have less assets but more income each year.

To spell it out, you can have $500,000 in super and you will be better off in terms of annual pension payments — super and government pension combined — than a couple with $700,000.

What’s the sweet spot? It would seem to be about $339,143 in super assets. At this level your total income will be $50,236.

Let’s compare the income a couple with $500,000 in super assets receives ($45,732) with the $80,000 income a couple will receive if they have $1.6 million in super. Those with the higher balance have more than three times the assets but only receive 75% more income.

The government says it changed the super system to make it fairer and more equitable. These are the reasons for the $1.6 million pension cap, the $250,000 income threshold for higher contributions tax, the lower contribution caps and the refund of contributions tax for lower income earners. Based on all our cases above do these arguments really hold?

For those earning anywhere between 80 per cent and about 180 per cent of average wages — that is between $65,000 and $150,000 — it takes a lot of effort and sacrifice over many years to save a meaningful amount of money towards retirement.

After looking at our case studies, why would you bother saving anything more than compulsory super and living in the best home you can afford that it is very well maintained?

Anyone earning $50,000 each year, which increases at 2 per cent each year while their super grows by 5 per cent after all taxes, fees and charges, and receives compulsory superannuation, will have $400,000 in super assets after 31 years of work.

At that point if they were to retire they would receive 100 per cent of their pre-retirement income.

Clearly there is a distinct disincentive for people in this situation to work for longer or to try and earn a higher salary.

Of course you can always argue the person with higher savings in the system is better off — we don’t know how future pension incomes will work and they have the option to spending their capital if they want … but that’s not the point. The point is the system has built-in discrimination.

Tony Negline is author of The Essential SMSF Guide 2016-17 published by Thomson Reuters.