Over 60’s to be Taxed on their Super?

There has been plenty of talk recently about what changes the government may or may not make to superannuation in the upcoming budget. Pressure is mounting on Labor to be seen as “fiscally responsible” and minimise the size of the deficit.

Will there be an increase to contributions tax or earnings tax? Is is only the wealthy or the super wealthy who will be targeted?

Earlier this year Julia Gillard ruled out taxing super withdrawals for those aged 60 and over. At the risk of getting offside with the super industry – how long is this sustainable?

According to the KPMG report Evolving Superannuation Industry Trends – November 2012:

“Since June 2004 the number of pension members has more than doubled whereas the number of accumulation members has hardly increased at all over the same period. ”

KPMG - Evolving Superannuation Industry Trends - November 2012
KPMG – Evolving Superannuation Industry Trends – November 2012

As those aged 55+ hold most of the super wealth, that is a lot of money moving from 15% earnings tax to no earnings tax. It is also a lot of people moving from earning an income and paying marginal tax rates to not working and drawing a tax free income stream (although the above also includes those drawing transition to retirement income streams and still working).

My strong view is that we need to encourage long term savings and self funding of retirement. The tax concessions need to remain better than non-super alternatives to encourage this. Adverse changes that discourage additional super savings risk being a greater burden down the track through reliance on age pension entitlements.

However with an ageing population change is inevitable. What else will be on the cards – restrictions on lump sum withdrawals?

I’m interested in your views?

4 comments

  1. Great article David. Really interesting chart as well showing growth in pension members vs accumulation members.
    The real positive for Super at the moment is that it is simple for retirees over age 60 in pension phase – no tax on pension payments and no tax on earnings.
    However, these tax concessions are probably too generous. I have some retiree clients saying to me that the system is too generous for them. Hard to disagree really.
    On the other hand, our older Australians have paid tax all their lives – and they deserve some tax concessions in their retirement years.

    So we definitely need to encourage long term saving and self-funding retirement.
    Maybe raising the contribution caps back to where they should be and rethinking the excess contribution tax regime.
    Maybe a modest tax on pension payments exceeding say $80,000 per annum for a couple and $50,000 per annum for an individual over age 60.
    And maybe a modest tax on earnings in pension phase – but still less than the tax on earnings in accumulation phase.
    There is a balance there. Lets hope the politicians and law-makers get the balance right.

  2. Thanks Paul, I think you make a great point about balance. There doesn’t seem to be much in the current debate.

    A post I wrote last year talked about the impact of lower contribution caps and how even a family with husband and wife earning $75-$80k could be disadvantaged. Plans to raise the kids, pay off the house and then fund their retirement were made that much harder.
    In some respects it will be easier for those in their 20’s (in contribution terms anyway) who will be forced to save more over their working life as SGC rises to 12%.

    I have had many conversations about tax free over 60 as well and there seems to be a general acceptance that it won’t last.

    1. Well we have some answers today on the questions.
      The new earnings tax for pension assets will impact some of our clients – but only 0.4% of the retiree population apparently.
      And at least moving in the right direction with concessional contributions.
      Interesting that no change to tax-exempt status on pensions over age 60 – good to retain that concession though for retirees.
      And if you run for a seat on the Council for Superannuation Custodians, you will get my vote.

  3. Yes Paul, I think the changes were somewhat less than might have been expected but more to it than first glance. Without a doubt we’ll see plenty of planning being done in the the next few years.
    Not sure the Council is for me – but appreciate that I’d have your vote!!

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