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RETIREMENT & LIFESTYLE PLANNING | |
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| ISSUE - 19 - WINTER 2004 | |
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The face of super Retire NOW or NEVER?
CHRIS WALKER
In May this year, treasurer Peter Costello released a policy paper flagging legislative changes to the rules regarding older workers and their superannuation. Chris Walker explains what this means.
Have you noticed that “retirement” seems to have become a bit of a dirty word? I often hear people refer to retirement in ways that makes it sound somehow toxic, a state they would never entertain. It’s as if they consider retirement an end to their life, which it isn’t, as opposed to an end to their working life, which it can be.
For me, having young kids, a whopping mortgage, and an annoying habit of not practising what I preach (as an investment writer), retirement’s no closer than the moon. Like millions of other Australians I’ll probably end up working well into my dotage.
If it’s any consolation, this will make us friends of Messrs Howard and Costello, who would be happy if we worked – and paid for ourselves – forever. We’re an ageing population and as the years pass the consequent pressures on the public purse will only increase.
Consider this – for every person aged 65 or over, there are about 5.3 people in the workforce. However, by 2043, this will decrease to about 2.5 workers for every person over 65, which doesn’t bode well for funding the public cost of the aged, including health care and the age pension.
This unsettling projection explains both the Government’s increasing exhortations for us to heartily invest in superannuation and its perpetual tweaking of the super system to ensure this investment happens.
In February 2004, Treasurer Peter Costello fired the latest major salvo in this campaign, with the release of his policy paper A More Flexible and Adaptable Retirement Income System, which outlines several measures it says will “improve the accessibility, flexibility and integrity of the retirement income system and reduce red tape”.
These measures, to be introduced between July 1, 2004 and July 1, 2005, are designed to encourage more people to contribute to super as well as permitting them to contribute for longer.
The minimum age at which you can receive your super – the “preservation age” – is between 55 and 60, depending upon your date of birth. The new measures will allow people who wish to continue working beyond the preservation age to supplement their work income with income from their superannuation. Let’s have a closer look at what’s proposed.
Removing the “work test” for super contributions for those under age 65
Historically, superannuation has been a retirement savings vehicle for working people. The general rule, or “work test”, is that to be able to make super contributions, a person under the age of 65 must have worked at least 10 hours a week sometime in the past two years.
To enable more people to contribute to super, the work test, which restricts who can contribute to super between the ages of 18 and 65, will be removed from July 1, 2004.
It means that people who have never worked, have not worked in the past two years or have been out of the workforce for many years, will be able to contribute to super. It also means couples will be able to contribute to super, whether they work or not, and for all those who do contribute to super as a result of this measure, they may be able to claim a tax deduction for their contributions.
There is no doubt that the ability to contribute to super, where it previously wasn’t an option, will help make many people’s retirements more comfortable. And there’s also no doubt that super is an effective retirement investment.
Relative to any other asset, apart from your own home, super is lightly taxed, and the very fact that you can’t get your hands on your money until later in life means you can’t blow it on wine, women (or men) and song in the meantime … which could be a disincentive, of course, depending on your point of view.
Changes to the work test rules for those over 65
From July 1, 2004 there will be changes for this age group too. Prior to this change, people aged 65 to 74 had to work at least 10 hours a week to be eligible to contribute to super. What’s more, a super fund had to pay out a member’s benefits if they failed this test.
However, as the population ages, work opportunities and patterns for older people are changing – including a greater involvement in seasonal and part-time work for older people. Recognising this, from July 1 this year, the Government will replace the current weekly work rules with an annual work test, and will also change the rules about funds cashing out their members’ benefits. (The details of this change are still to be worked out at the time of writing.)
Overall, these changed work tests allow people to keep their super investment until their permanent retirement from part-time employment.
The whole point, once again, is to make it more appealing and easier to continue contributing to super, even well into your senior years.
There is no doubt that the ability to contribute to super, where it previously wasn’t an option, will help make many people’s retirement more comfortable
Receiving an income stream from super prior to retirement
Prior to July 1, people below age 65 generally could not receive their super until they reached their preservation age, and retired. Consequently, some people retire earlier than they’d like just to get their super. If they had their druthers, they would continue working past their preservation age, perhaps part time.
Under the Government’s new proposals, from July 1, 2005 people who have reached their preservation age and have not retired, will be able to get access to their super as a “non-commutable” income stream to complement the income from their paid work, which is quite likely to be part time. (A “non-commutable” income stream is one that cannot be paid out as, or “commuted” to, a lump sum).
This measure, still to be finalised, will increase choice and flexibility, and should benefit many older workers.
Compulsory cashing-in of super for people over 75
Until July 1, 2004, anyone over 75 and still working at least 30 hours a week can leave their super untouched, possibly not accessing it at any point during their life.
However, from July 1, 2004, super funds will be obliged to pay out benefits to their members aged 75 and over, either as income or a lump sum. (This will not apply to those over 75 who still receive super contributions under an industrial award).
This change is designed to force super to be used for what it was intended, namely, a source of funds in retirement not a tax advantaged asset for estate planning. It’s a change that may not be welcomed by those over 75 who do not need access to their super.
Changes to assets test exemption for complying income streams
This change affects those who may be eligible for the age and service pensions, even if just a part pension, which confers a range of valuable benefits.
Anyone applying for the age pension must meet both an assets and an income test, where having too much of either disqualifies you. That said, there are some concessions in calculating these amounts so that certain investments aren’t counted. A key exemption from the assets test are “complying” pensions, which provide an income stream in retirement. (“Complying” pensions or income streams are so called because they comply with the requirements of the super system. To do this, they must provide an orderly draw down of capital over a person’s lifetime or life expectancy, and cannot be taken as a lump sum.)
In order to save the public purse, the Government is trying to make it harder for wealthier individuals to get the age pension or part pension, and as part of this push will reduce the 100 per cent exemption of complying pensions from the assets test to 50 per cent.
This applies to new complying income streams purchased on, or after, September 20, 2004, and it will increase the size of your assets as assessed by the assets test, potentially leading to a cut in, or possible exclusion from, your entitlement to the age pension.
Anyone likely to have their eligibility for the age pension affected by this change (if they are near the upper assets limit under the assets test), and who are thinking of buying a complying income stream, should get advice from their financial planner, and probably do it before September 20 in order to get the 100 per cent assets test exemption.
Other measures put forward in the Treasurer’s policy paper include: giving “complying” status to a new range of market-linked income stream products (“growth pensions”); and, removal from July 1, 2004 of your ability to get access to any part of an eligible termination payment prior your preservation age if you have rolled it over into a super fund.
These changes to the super system in particular, and the provisions of the entire super system in general, are dense and potentially very confusing. For this reason, when it comes to making the right (or maybe any!) decisions about super, you really do need good, professional advice. It’s one investment area where it’s very hard (impossible even?) to try to do it on your own.
That said, these measures, generally, provide more choice in contributing and getting access to super, and by and large should be welcomed by most Australians in, or approaching, retirement. I certainly intend to take advantage of some of them as retirement, very gradually indeed, looms closer.
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