The legislative changes to the assets test rules that kicked in on 1 July 2017 are having a detrimental impact on the Australian retirement landscape, particularly on SMSF managers, middle-income earners and age pensioners.
The SMSF Association claims that the changes discourage sensible retirement savings habits and are also having negative effects in other areas, such as estate planning and death benefits.
“In the lead up to 1 July 2017, the industry’s focus was on optimising contributions and reducing pension accounts to under $1.6 million as well as considering CGT relief for those affected by the transfer balance cap and transition to retirement changes,” said SMSF Association Chief John Maroney.
“A consequence of this understandable focus on these issues requiring immediate action was less attention being paid to the longer-term strategic consequences of the changes,” he said.
“Now the industry has had time to reflect on the changes, it has recognised the enormous impact on estate planning that wasn’t appreciated at the time the changes were introduced.
“It’s also had the effect of making death benefits, always a complex issue, even more complex. The reality now is that SMSF members who fail to appreciate what these changes mean, or who fail to get specialist advice, could find themselves being forced to move money out of superannuation.”
Mr Maroney said the changes have also led to “significantly adverse and presumably unintended consequences” for age pensioners who’ve had a reduction in entitlement as a result of tapering and thresholds, as well as middle-income earners trying to save for retirement.
“For home-owning couples who have a superannuation balance between $500,000 and $800,000, the increased taper rate creates a ‘black hole’ where their assets above the asset test-free amount cause them to be worse off in terms of income,” he told superannuation journal Financial Standard.
“This is caused by the taper rate of the equivalent of 7.8 per cent a year, reducing their pension entitlement at a rate exceeding the income they earn from their superannuation balance above the asset-free area. This is especially so in a low-interest rate and investment return environment.”
For middle-income earners, the rules have led to “detrimental behaviour” such as shifting investments from assets included in the means test, such as superannuation, to assets that are excluded, such as the primary residence.
There are fears that, while the rules may help to ensure pension sustainability, they may not be working well for everyone.
“We believe having the superannuation and social security systems properly integrated is a key facet to achieve an efficient and sustainable retirement income system, and that the current siloed approach to policy making in these areas is creating perverse outcomes for individuals and couples,” said Mr Maroney.
Do you think the rule changes are fair? Have you been adversely affected by them?