For some time I have been wanting to pen or type an article on what I believed is the commoditisation of Superannuation in Australia.
Last night, 3 May 2016, the government released new measures to target superannuation on a grand scale. These measures are the biggest changes since 2007 and cement changes discussed over the past few years to target higher income and higher balances. Lets be frank, they are not easy calls for the government and will upset a lot of people - people who have a lot of money. This will affect every Australia however as superannuation has now almost completely been commoditised and it’s now all but a sit and forget for most Australians.
Putting my point of view aside for one moment, it is clear the government had to make some changes to the way the current superannuation structure was set up. There’s no point pretending or turning a blind eye that the relaxed rules in the past are greatly benefitting a lucky few. The rest that didn’t have the means or know about these huge tax write-offs now don’t have the chance. If how the government has decided to do it is right, time will tell but as you will see in my article last year – 5 SMSFS have over $100 mil it needed to be done.
In the 70s and 80s, Superannuation was around in some form but in 1992 the Keating Labor government introduced the Superannuation guarantee. Since then Superannuation has grown to well over $2 trillion and it is one of the most enviable retirement saving pots in the world. Fundamentally, Superannuation is a pay on the back to the government. The problems have been plenty however and it’s been twenty four years of annual tinkering to create a fair (maybe fairer) system. The changes, last night are basically the final nail and if they go ahead with It, the huge carrot that Australia families once had with superannuation is now only a baby one.
It’s important to understand superannuation and the moving parts, so in that vain please have a read of below.
There are five main areas to consider with Superannuation
- Contributions – Money In
- Withdrawals – Money Out
- Tax – Money Out
- Products – Money Out
- Investments- Money in or Out
If you consider superannuation as a bath for a minute. You have a tap which is your contributions and you have three main holes in it – withdrawals, tax and products fees. There is also a bucket sitting to the side that will every day either add a little when things are good or take out water when things are bad with your investments.
The goal with the bath is to get to retirement and the bath to be full but bit by bit it will start emptying and hopefully not run out as you get through your later years. Ideally you have a little bit left at the end but most people will not.
It’s a simple game and if you think about it this way, you can see the goal really is simple. Put in as much as you can, take out the minimum you can, avoid paying any tax and reduce the fees on any products. If you think about it this way, you also want to make sure you get a good consistent investment return because you don’t want water to flooding out at any point.
Last nights changes have really challenged the most important parts of this that you can’t control – the amount you can put in to the bath via contributions and tax going out of it. You can control the other things if you try to be smart.
There are two types of contributions
In 1992, Government started it at 3% of salary. But that was not going to pay for the electricity and an annual caravan trip, so over time it rose to 9% in 2004 where it stayed for over a decade. Further research said that is still not enough and it will rise to 12%- (maybe we eat out now too at the local RSL). Most people would agree it needs to be rising even further to at least 15%, maybe even 20% as apparently we are going to live to 120 with a 3D printed heart.
There is a small catch, the compulsory amount an employer has to pay is subject to a cap and presently it around $20,000 – once you earn over about $200,000 a year the employer can stop putting your 9.5% in. Make sense and if you earn $200,000 it’s a bit disappointing.
On top of this you have,
In the optional space, you have two options
- Before Income Tax – Concessional
- After Income Tax - Non-Concessional
Concessional – Before Tax
When super was introduced the government thought "we need to encourage people to put money in so lets make it advantageous”. So they allowed people to reduce their taxable income by a super contribution. This over time was a significant benefit and none more so than in the 2007 and 2008 tax years. People over the age of 50 in those years could put in $100,000 before tax. This was a huge tax write off and basically a big benefit for those planning for retirement. While this was a great tax write off coincidently it was the worst time to invest in world stock markets as the GFC happened in 2008 –great work. This strategy for most people does makes a lot of sense if you do not have a lot of debt but now the limit is a total of $25,000 less your compulsory amount. Not a lot of money.
The New Paradigm -This was a great option for Australians to save for retirement but this has now been reduced to $25,000 – a fair cry on the $100,000 and that ship has now sailed for every Australian. If you want to prepare for your retirement, you really want to make sure you try to hit this $25,000 every year If you can afford it as I don’t see it rising significantly again in the future.
My opinion - I think this is not far off where it needs to be for most Australians long term, but for people over the age of 50 they are left scratching their heads thinking I should have put more in earlier. I personally think $30-40,000 would be better or a higher amount for people over 50 still but the rules are the rules and now you need to make sure you don’t miss this boat as well.
Non-Concessional – After Tax
In mid 2000s the government thought of another good idea and also wanted people to put their own personal money in to super. So they said in 2006 “you can put in one off lump sum and as big as you want”. Well not as big as you want but a $1,000,000 is not bad per person. Then following this you could basically put in a $1,000,000 every three years for a couple. As you can see, if you maxed this out - you potentially could have put 10 years in or $1,500,000 per person - $3,000,000 for a couple. So a total of $5,000,000 since 2006. You can start to see why we have some huge super funds in Australia as “the rich” have been using these rules every year.
The big benefit with putting money in to super is that the tax you pay on it after the age of 60. It’s pretty much tax free, well it was. It was like a mini tax haven where some funds have $100,000,000 growing tax free and yes that is $100,000,000. I will talk about this in more detail in tax section but that’s not as enticing now and secondly the government has now limited the contribution amount to a maximum of $500,000 each.
So we have now gone from $1,000,000 each in one year to $500,000 or so every three years to $500,000 forever. If you want this in other terms, $5,000,000 potentially for a 30 year old before they retire to $500,000.
The New Paradigm -This was a great option for Australians to save for retirement in the years close to their retirement but this has now been reduced to $500,000 in total – you can still do it but it’s much lower. If you want to prepare for your retirement, be very careful to make sure you haven’t hit this already and it might be wise to use it before you potentially loose it one day again.
My opinion - I think this is a bit too far the other way because it’s too late and the big money families have already put the money in. It’s like a favourite quote of mine – closing the barn door after the horses have bolted. I also think $500,000 is too low over a lifetime but that may change I imagine one day. Super is no longer a structure you can pump millions in to - $500,000 each over a lifetime.
One of the benefits of our system is really after the age of 65 (sometimes 60), you can do whatever you want with super. You can withdraw it tax free and use it on whatever you want. This is staying the same but it will change. It’s currently 56 before you can touch your super at all, this is rising to 60 but it will undoubtably go to 65 then 67 and maybe even 70. This is currently all lining up to a set date with the age pension and that will push out older because we are living forever apparently. It’s basically been commoditised and strategies around Transition to Retirement have almost evaporated as well.
I advise my clients to consider their money in Super to use from 70-100 not 56-70. It’s really money you want to use post 70. If you are worried about your health in your 70s, it’s best to try whatever you can to get healthy now so you can use it when you are in your 70s.
Tax is always a funny one – people say "I don’t want to pay any tax", I always reply and say "I want to pay a lot of tax". Tax is exactly that, a tax and the more money you make or earn, the more tax you pay. The problem with tax however is that it really is a free kick for the government and they make money off you making money. You take the risks and they make money.
Super has always had to have a low tax environment and it still is this way. Most people pay 30-50% income tax on income and 20-25% on capital gains tax on investing personally. In Super, it is 15% on income and 10% usually on capital gains. So in summary it’s around half the tax of owning personally owning investments.
Super is still tax efficient to invest in but the real benefit was the carrot that they have been dangling to everyone – the tax haven after you are 60.
This was a HUGE benefit, you could have unlimited money in super after the age of 65 (60 if stopped working) and it is growing tax free.
Some people have used this to their advantage as discussed above but it really was unlimited. If you have $5, $10, $15 or $100 million it was growing and earning income tax free. Last night the government said enough is enough.
They have said that the maximum amount you can have growing tax free is $1,600,000 per person or $3,200,000 for a couple. Not pocket change but a big difference from unlimited.
The rest needs to be taxed at Super tax rates, still half of what they usually pay personally.
The other tax was on making contributions and this was always 15% but it has now risen to 30% for people earning over $250,000.
The New Paradigm –This really was the biggest carrot Super had going for it and now it is massively limited at $1,600,000. This does however mean you need to try to ensure both partners have equal super balances and secondly, $3,200,000 will still provide a very nice retirement for anyone in my books. It’s not the end of the world and something had to be done.
My opinion – I personally think this had to be done and whether $1,600,000 is the right amount no one will never really know. It’s not a science because the goal posts are always moving but it’s probably not far off it.
Over the past 20 years, Superannuation can only be considered a gravy train for platform providers (IE: Big banks), Fund managers and advisers. Developing technology, low consumer engagement, strong investment markets and low competition allowed it to keep chugging along. That has changed dramatically, it’s ultra competitive, there’s lot of engagement (still not enough), technology is snowballing down the hill and poor investment markets has exposed the not so flash hot managers.
On the back of this all funds are becoming similar – you can do everything almost outside a SMSF as in one (besides property) and fees are tiny now. The government legislated mysuper and fees are now usually under 1% sometimes under 0.5%. This is much better than the 2-3% that was around in the 90s.
Fundamentally, if you have one fund and it’s a low cost fund that you have reviewed. If it’s in a good investment choice and suited to your long term needs, it might be ok for a long time now. If things are very similar and pricing is very cheap, I don’t see too much changing here. It’s the fight to the bottom and all product providers know it.
This is an interesting area and I do see big changes over the years here. Fundamentally there will still be the usual asset classes (shares, property, bonds, cash) but as technology develops there will be interesting ways to get better exposure to certain things. IE: Property, Private Equity, International shares, Venture Capital, Emerging trend - who knows but it will expand i’m sure. This could create more diversification, something everyone needs and also potentially ways to leverage up your super if relevant. It will also automate ongoing management and bring more control and transparency to the super fund member. It’s all good news here.
But overall, investment options are becoming simpler and more carefully watched. If they are not doing what they say on the tin, they are not surviving. The key with investing is to not to go chasing rabbits. Chase one and forget about the others. If you keep chasing different ones, you most likely will catch none and be left empty handed. Please note; no rabbits were hurt in this example and because i’m not a farmer, I am a fan of them.
So that’s the summary there, Super is really now going to be part of your wealth outside your home. Part that you can’t do much about besides sit there and let it tick away until you are 70 maybe to 100. You can put in a bit more in but not much. You really need to look outside super and consider what do I need to do to support my lifestyle, passions and family before I get access to super.
I would love to hear your thoughts and get a discussion going.
Please note; all these figures and facts are general in nature and are accurate to the best of my knowledge. They are also not to be be used to base your personal decisions. Please go get advice from an adviser who will tailor it to you and provide a statement of advice.