Aviva congratulates the government’s 2009 budget effort. It is evident that the challenge of current economic difficulties and a dramatic fall in revenue has required hard decisions to be made at the expense of an ageing population not adequately funded for retirement.
Aviva congratulates the government’s 2009 budget effort. It is evident that the challenge of current economic difficulties and a dramatic fall in revenue has required hard decisions to be made at the expense of an ageing population not adequately funded for retirement.
Not surprisingly, most of the changes to our industry were legislated prior to budget night (such as Reportable Employer Superannuation Contributions and Centrelink benefit eligibility). There are, however, some big issues that require consideration. Despite some media speculation that there would be a reduction to the concessional contribution caps to A$25,000 and A$50,000, this was not effective immediately, and the government has been sensible to ensure they begin in the new financial year.
Even more importantly commonsense has prevailed with the non-concessional contribution cap remaining unchanged, that is, six times the concessional contribution cap whereas as it was previously three times the concessional cap (and the three year forward provision of A$450,000 is untouched).
The problem is indexation. It is going to take a long time for the A$25,000 to be indexed up to the next increment of A$5,000. If you were to assume a 3% indexation rate it would probably be eight years before we saw a concessional contribution cap of A$30,000 and a non-concessional cap of A$180,000 (6 x A$30,000). In eight years time we may have a different government.
This immediately poses a problem for advisers who have recommended funding large amounts of insurance cover through superannuation for business succession or business protection purposes. Consider the 40 year old client who is funding A$30,000 worth of cover through their self-managed superannuation fund and receive A$10,000 of superannuation guarantee contributions.
For advisers and clients this also means a longer period of cash flow management to achieve their retirement goals. However more changes will be introduced in the six months following the budget. The budget introduces a phase up of the age pension to 67 years old, but the Henry Report also recommends that the superannuation preservation age also increase from 65 to 67 years.
It is anticipated that the government will announce further changes over the next six months. If the age pension, and the preservation age progressively increase to age 67, surely for the sake of consistency it would mean that:
- Contributions could be made until age 67 without a work test
- Anti-detriment calculations to age 67 would be possible, and
- Disability benefit additional tax free amounts could be calculated to age 67.
It will be even harder to qualify for social security benefits and allowances when salary sacrifice contributions are included as income.
There is a 25% increase in the taper rate for both single and couple pensioners. Changing of taper rate for the income test will disqualify more people from a part or full pension far more quickly. For pensioners a change from 40c to 50c in the dollar means about 30% of pensioners will be affected.
And don’t forget a person who fails to get the age pension also fails to get the Pensioner Concession Card. This leaves the baby boomers with a chance at the Seniors Health Care Card once you are age 67 but salary sacrifice contributions will be counted if still working.
We could speculate that if there is a dramatic improvement in world markets, some of the changes may be unwound or eased - but don’t count on it! We still have an ageing population that is relatively unfunded and a national debt to repay.
Our industry is nothing if not resilient, so let’s consider the positives.
There were no changes as rumoured to transition to retirement pensions and tax free pensions from age 60.
The worker bonus with a concessional assessment of income from employment for the age pension needs to be thoroughly explored and the new pensioner and beneficiary Cost Index is an interesting concept. But if the caps are lowered and preservation age / age pension increases to age 67 then a lot more people are going to be funding more of their "early retirement" nest egg outside of the superannuation system.
Thanks very much that managed investment trusts can make an irrevocable election to apply the CGT regime to disposals of eligible assets. This means resident investors will be entitled to the CGT discount on eligible taxable gains distributed by managed investment trusts. Not only good news for baby boomers heading for retirement but those perceptive generation X and Y investors naturally averse to superannuation preservation. This is a nice little surprise in the budget and worth exploring.
By Martin Breckon, technical manager
-ends-
For more information or to interview Martin Breckon please contact:
Ariana Alvarenga
Public Relations
Phone: (03) 9829 8985
Mobile: 0409 187 487
Sue Voglis
Research & Public Relations Manager
Phone: (03) 9829 8057
Mobile: 0408 309 247
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