Superannuation changes

After months of speculation, the Federal Government finally revealed the changes it is making to superannuation.

To understand the changes, first you need to know that the government defines super in two phases. The first is the ‘accumulation’phase (when you are still working and earning superannuation payments) and the second is the ‘pension’ phase (when you are retired and withdrawing your super).

The biggest change is that people with superannuation accounts which generate earnings above $100,000 per year (usually meaning they have more than $2 million in them) will now be liable for a 15% tax on yearly earnings.

Currently, there is no taxation on super when it is being paid out (in the pension phase) regardless of the size. Treasury believes that 16,000 accounts will be affected when the changes go live on 1 July 2014.

In a statement, Treasurer Wayne Swan’s office outlined that in just four years, 20% of Australia’s population will be over 65.

Treasury is also making allowance for capital gains on assets purchased before the changes. Assets purchased before 5 April 2013 will not have the reform applied on capital gains before 1 july 2024.

Defined benefit funds (such as the one politicians get) will also be subject to the 15% tax rate where yearly earnings exceed $100,000.

The Association of Superannuation funds of Australia (ASFA) came out in support of many of the changes, releasing a statement outlining the changes and what the industry’s view was.

““The goal of the superannuation system is to support people so they have enough income to live a comfortable retirement and people who have large balances with earnings of over $100,000 per annum will be able to do this even with the additional taxation applied,” read a statement from ASFA.

“At 15% they are still receiving a significant tax advantage when compared with income taxed at marginal rates,” added ASFA. “Therefore we are not against a measure of this type, although ASFA believes a more reasonable figure would be applying such a tax on earning on balances over $2.5 million ($125,000 annual return at five per cent) as we stated in our pre-budget Submission in February this year.

“We do have some concerns with how this will be implemented as it appears to be complex to administer and we will consult with government regarding this over the coming months.”

Another change being brought in is an increase in the contribution cap for those aged over 50. Currently there is a $25,000 cap in place, with contributions over that amount being penalised (defined as an excess contribution). Under the new system, people aged over 60 will be able to contribute $35,000 per annum, regardless of account balance, starting from 1 July 2013.

Those aged over 50 will be able to contribute up to $35,000 per annum, regardless of account balance, starting a year later on 1 July 2014.

Excess contributions (over the cap) are currently taxed at a rate of 46.5% regardless of their income. Under the new system, the government will allow individuals to withdraw any excess contributions (often made unintentionally).

The excess contributions will also be taxed at that individuals marginal tax rate, rather than the 46.5% that it is now (for most people it will be significantly lower).

“We have been advocating this issue for a long time and wholeheartedly welcome this initiative as a simpler and fairer way to tax excess contributions,” added the ASFA.

The government is also planning to establish a Council of Superannuation Custodians made up of representatives from the community, industry and regulators to provide independent advice on superannuation policy.

Saving for Retirement

More Australians are saving their monthly disposable income, however we’re still surprised to realise that very few young Australians are saving for retirement.

Despite the fact that more Australians are saving 10 per cent of their household disposable income, The Reserve Bank says people are banking their money or paying down mortgages because of a “change in households’ attitudes towards debt and financial vulnerability”.

50 per cent of young women are currently putting aside money for their first property where they are also taking advantage of the Co-contribution- Bargain Hunters.

It’s a widely known fact that women in general face challenges and obstacles in saving for retirement, which should place retirement planning at the top of their to-do list. However young women are not preparing for their retirement years, and do not realise that the earlier they begin investing for the future the less they will need to save once they approach retirement.

What ever their expectations for retirement may be, young Australians say they have more pressing financial priorities than putting money aside for old age.

  • Saving money for rainy day emergencies and near-term needs
  • Putting money aside to buy a property
  • Saving up to go on a holiday
  • Putting money aside to buy a new car
  • Women of Generation Y tend to carry a view that retirement is far off in the distance but the reality is members of this generation have much longer life expectancies than their Baby Boomer counterparts.

In the past, Baby Boomer retirees only needed enough money to live for a few years after they stopped working. Now, as people continue to live well into their 80, 90s and beyond, the young generation need to make sure they have enough money for these extra years.

If you’re a woman and retire at the age of 65, then you need to plan to be living the life of a retired lady for, on average, nearly 22 years – possibly as long as your time in the workforce, or as long as the time spent rearing children. Retiring at the age of 60 will mean that you need to finance 26 years of your life of leisure.

If saving for your retirement sounds like too much planning and hard work, you can always try the ostrich option. The ostrich is the largest bird in the world and is famous for sticking its head in the sand during times of stress. Sticking your head in the sand is definitely an option if you want to be scratching around for financial scraps when you retire.

Now is a good time to take your head out of the sand, rather than spending your days in financial darkness.

We can help

Income Protection – how much is enough?

Q. I have an Income Protection policy with a Lifetime Benefit that I have had policy for over 10 years. I have just received my renewal notice and my insurance premium has increased by over 20%. What options do I have to reduce the costs? I am 42.

A. Income protection pays out a regular monthly benefit of up to 75% of your income for the period of time you are unable to work as a result of sickness and accident. Your policy will have a waiting period which is the time you are off work before a claim is accepted. Your policy has a benefit period which in your case is for your lifetime.

Lifetime benefit policies were offered in the Australian market in the 90s and early 2000s. Prior to this time, the benefit period on policies was limited to age 65. As competition between insurance providers escalated, companies offered greater benefits whilst aggressively competing on price. In the early 2000’s, Insurance companies ceased offering a lifetime benefit. This was in recognition that a claim for the rest of an insured’s life could be a very large open ended claim and unsustainable in terms of funding risk. The claims experience in the industry in the last 10 years has also meant that premium rates have been too low and as such across the board all premium rates have increased on or around the rate you have experienced.

Your policy is a non-cancelable policy. This means that the Insurance company cannot cancel the policy. You can cancel the policy and I suspect the Insurance company would dearly love you to do so!

You need to determine how valuable an open ended claim benefit is to you. If you have accumulated assets that you could reasonably rely on to provide for income in retirement, then a benefit ceasing at age 65 or earlier may be sufficient. Remember, this policy will pay out the agreed value of your monthly benefit which would have been 75% of your salary at the time of application, indexed to inflation thereafter. You will need to determine whether the current monthly benefit you have, will provide for living expenses and also fund some form of retirement savings. Remember, benefits received are also taxable as income.

There are 4 ways you can reduce the premiums you are being charged; reduce the benefit period from Lifetime to a shorter benefit period. Increase the waiting period from 30 days to 90 days or longer. This may be in recognition of accrued sick, holiday or long service leave. Reduce the monthly benefit if you can afford to live on a lesser monthly income amount in the event of claim. Finally you can change the policy from an agreed value contract, to an indemnity contract where you provide proof of income at the time of claim.

Carefully assess the savings you derive by pursuing any of these options as it may be a false economy. You will be able to shop around to other providers but your application will require new underwriting. Note also that no insurer will offer Lifetime benefit terms so you will be limited to a benefit to 65 at best. Make sure you are comparing like policies and be aware of the consequences of any reduction or loss of benefits.