Super’s attraction wanes as tax benefits decline

The Australian

5 February 2018

Stewart Oldfield

While some are calling 2017 the peak of the Australian housing market did another boom also peak but get far less attention?

For a couple of decades super has been the preferred vehicle for wealth accumulation for well off Australians, but according to some that might be changing.

Thanks to an ongoing legislative crackdown on the tax benefits of super there is a real prospect that over the next decade that Australians will direct more of their savings to homes outside of a super structure than within.

According to research house DEXX&R, retail funds held outside of super are projected to grow at 8.7 per cent per annum over the next 10 years while funds held within the pre-retirement super tax structure are projected to grow at only 6.6 per cent.

This is a big change from the past when post-GFC super funds under management was growing at 9 per cent or higher and super was the preferred tax effective investment vehicle for those on high incomes.

The switch of fund growth will have major ramifications for Australia’s financial services industry and the type of products it builds and markets to consumers.

“The days of high net worth individuals pumping money into super are pretty much over,’’ says Mark Kachor, principal of DEXX&R. “Super has peaked as anything other than its true purpose — funding working Australians in their retirement.’’

Rob Coombe, a former CEO of Westpac’s BT Financial Group and now the chairman of listed investment bond provider Austock Group, says negative investor sentiment towards super has been increasing for some time.

“People frankly don’t trust the system and are worried about putting more money into it in case the preservation age gets pushed out or the tax gets increased,’’ he said.

There were three changes introduced last year that look to have put the brakes on wealthier Australians pumping millions into super. From July 1 last year, the federal government introduced a $1.6 million cap on the total amount of super that could be transferred  into a tax-free retirement account.

It also lowered the maximum size of after-tax, (otherwise known as non-concessional) contributions to super to $100,000 a year from $180,000 a year.

Then there were changes to the size of permitted pre-tax (otherwise known as concessional) contributions to super.

The maximum size of concessional contributions to super was dropped to $25,000 per year for everyone under 75 and an extra 15 per cent contribution tax on concessional contributions was introduced for those lucky enough to be earning more than $250,000 a year (down from more than $300,000 a year).

The changes came on top of pushing out the so-called preservation age — the age at which you can access your super — announced back in 2015.

Coombe said that collectively the changes were extremely negative for wealthier Australians who had traditionally put a lot of money into super. He said the changes were going to stem flows into the super system as a preferred tax structure.

He said that even those with room to put more money into super under the $1.6m cap introduced in July were increasingly nervous about the “shifting sands” of the regulatory settings for the super regime.

Some analysts have estimated that in the current financial year there will be an additional $18 billion available to be captured by fund managers outside super.

And Coombe expects more legislative changes to super to come in the future. For instance, further delays to the age at which we can access our super.

“The government is always hungry for revenue so they are going to keep going back to the super pot,’’ he said. “That trend will continue whether Liberal or Labor, but will potentially accelerate under a Labor Party leading the country.’’

Not that change is a bad thing, according to Coombe.

“I felt that very strongly that the superannuation system in Australian had drifted away from the original intention of it when it was set up — to provide adequate retirement income for all Australians.

“In many ways … it had become a tax haven for the wealthy. People were incentivised to basically jam as much money into super as possible given the favourable tax environment.

“That era is coming to an end.

“The non-super market will explode’’.

Coombe’s Austock Group (which is changing its name to Generation Life) is preparing to launch a raft of new financial services product for Australians looking to invest outside of super.

“The best thing that happens to our business is all the bad things that happen to superannuation. So long may it last,’’ Coombe said. “In many ways I am hoping for a Labor Party to be elected.’’

For its part the federal government said at the time of announcing the $1.6m cap that only a select few people will be affected by the measure.

The average superannuation balance for a 60-year old Australian nearing retirement was $240,000 and therefore less than 1 per cent of fund members would therefore be affected by the cap.

Similarly, less than 1 per cent of fund members would be affected by the changes to the non-concessional contribution rules.

“Superannuation tax concessions are intended to encourage people to save for their retirement. They are not intended to provide people with the opportunity for tax minimisation or for estate planning,’’ the government said when announcing the measures.

Stewart Oldfield is a director of industry intelligence firm Field Research.