Australia is a wonderful place to live, raise a family and grow old, but going by the media’s reaction to this week’s budget you’d be forgiven for thinking the growing old part is no longer the case, but really, it is. The response has been an illustration of two truisms: first, the media will always paint things in the worst light because bad news sells more papers, and second, once people are used to having something they hate having to give it up. We’re not being cheerleaders for the government; all we’re saying is that, despite what you may have heard or read in the media, superannuation remains the most attractive tax-effective investment.
The changes made to Australia’s superannuation system by the Howard government some 10 years ago, especially allowing all earnings to be tax-free once a superfund is being drawn on to pay a pension, made our superannuation system by far the most generous in the world. Unfortunately they were presented as permanent changes to the tax system but were funded by a temporary resources boom, a combination that was always tenuous.
The last three governments have reminded us constantly that Australia is living beyond its means, insofar as social security, health and education funding is growing at a faster rate than tax revenues and the gap is being filled by growing government debt. Changes have to be made, but with the government in election mode they chose to target raising revenue in a way that doesn’t impact households’ current income. Thus they ruled out increasing the GST and changes to negative gearing, choosing instead changes to income that’s so far in most peoples’ future that they don’t feel the pain for now, and those that are affected in the near term probably already vote for them anyway.
Despite the proposed new rules limiting the tax-free superfund balance to $1.6 million and reducing the amount people can contribute to their superfund out of both pre and post-tax income, superannuation remains the most attractive and tax effective way of saving for a comfortable retirement. The main difference now is that superannuation is more of a retirement income scheme than a wealth generation scheme.
Under the proposed changes a couple will still be able to have a Self Managed Super Fund balance of $3.2 million on 1 July 2017 that pays no tax – that’s a lot of money – and that balance can enjoy unlimited growth and remain tax-free. Also any amount above that will remain tax-advantaged, paying 15% tax on earning which is 30% below the maximum rate.
It’s also worth remembering you can have investments outside super. Let’s say a retired couple each has $500,000 worth of investments that earn a return of 7% per annum. That’s $70,000 worth of household income that would attract total tax of less than $7,000, or a tax rate of less than 10%. For those looking for alternative tax effective investments insurance bonds are another very attractive option, where earnings are tax-free after 10 years.
One thing the proposed changes to super underscore is how important it will be to make sure you maximise your super contributions during your working life, particularly since there is now a non-concessional (or post-tax) lifetime contribution limit of $500,000. That means the strategy of downsizing your home just before retirement in order to boost your super balance will be a little more restricted. (That is one area where we think the government should be more generous.) It also means it is even more important to make sure your super is invested wisely.
Having said all that, it is difficult to argue against the view that people should be able to rely on the rules governing retirement saving when planning for their future. Unfortunately, that will require a government that is willing to address tax issues that impact voters’ household income now, rather than in the future.
Despite the stern and often gloomy commentary from the media, the changes to superannuation proposed in last Tuesday’s budget take the system from being amazingly generous to just very generous. Those who argue those changes will stop people contributing to super altogether are neglecting the potentially profound long-term impact that lower tax rates have on a portfolio’s balance. Australia is still a great place to grow old.
