It is a truism worth contemplating in the context of superannuation planning, that “you don’t know when you are going to die!” says Ross Greenwood. Clever and nice fellow Ross.

Recent Research conducted in Australia by Vanguard indicated that 38% of pre-retirees are “anxious” when thinking about [their] financial situation in retirement.

Frequent changes and particularly any retrospective effect of changes, means two things to us: all our planning parameters are immediately changed – what we did was right when we did it and is now wrong – and our confidence in what we do for the future is pretty well shattered. Now that makes me anxious! … and means I’ve wasted a lot of time and money on financial planning and in the future I will have to spend even more to stay on top of my game!

Changes to superannuation are anxiety creating

In particular, at Retiring not Shy!  we have been turning our minds to those, like us, who have a combination of a defined benefit pension i.e. guaranteed pensions from commercial* or government* funds, in conjunction with another, say, self-managed super (SMSF) pension. Our concern being due to the recently introduced $1.6m limit.

At this point I must say, if this is beginning to sound like you, you need to seek professional accounting, tax and financial planning advice to understand your individual situation.

Why is the $1.6m limit a concern?

First up, for me with a part Commonwealth pension, there is a 16 times multiplier used to arbitrarily determine the value of your ‘member component’ or ‘balance’; the formula being the fortnightly pension amount divided by 14 and then multiplied by 365, then multiplied by a factor of 16 to obtain the valuation amount.

I say ‘arbitrary’ because, I believe, it has been acknowledged by the Tax Office that this is not actuarily determined. Similarly, there is no differentiation on the calculated value if you retire at 60 or 75, and that seems a little unfair. Also, these calculated amounts have no correlation with what your fund may be actually earning. Both aspects of the calculation represent a very blunt instrument for such a critical calculation.

Secondly, we, and many like us, have reversionary clauses in our super fund to provide for a partner/spouse or dependant. So, when I die, suddenly Jan has (or theoretically could have; we wish) a problem because her Superannuation account (now equal to the calculated value of both of our SMSF accounts) exceeds $1.6m! Jan would then have a relatively short timeframe after I die to rearrange her affairs by removing money from the fund, (and decide what to do with it) or put it back into accumulation mode, if that was possible.

Dealing with death of a loved one and complex financial situations.

So the impact of this $1.6m maximum is that, potentially, at a time when you least want or are least able to deal with changes in structure and disbursement of funds, due to grief and age, you either deal with it yourself or hand off that responsibility to someone else on your behalf. Handing off diminishes your independence and control, and cruelly that appears to be more and more likely due to never-ending changes. It also appears there are no review mechanisms enabling adjustments to account for inevitable rises and falls in investment, and more importantly no “grandfathering” of these arrangements.

The value of our SMSF will vary with the market at any given time, sometimes with radical, prolonged effects e.g. another GFC. If I die in one of these market lows, but a snapshot has determined the fund value as ‘over $1.6m limit’ and Jan has to sell assets to come within the limit, in reality she will have less than what may otherwise have been expected. Effectively she may be required to devalue an asset base built from years of planning; not an enlightening prospect. What indeed if a snapshot is taken and then high medical expenses come in to play; their seems to not be a review mechanism to deal with those situations either.

The whole estate planning expectation you’ve had over say 20 years, for example, bringing the kids into your SMSF, can be thrown out the window due to a politically imposed limit. Our politicians have the right, I don’t argue with that, but it would seem a very clumsy and unsubtle way of raising revenue, and not that popular at election time.

If you’re in the situation of having a defined benefit pension, not knowing when you (or your partner) will die, this now means you have to plan in far more detail for your futures, and start shopping around for a crystal ball, which will enable you to foresee the next set of band-aid changes!

Looking into a fuzzy crystal ball

As if it wasn’t difficult enough already! All we are trying to do is to ensure we are not put into the Government’s hands and needing to take a whole or part taxpayer funded pension.

A general point about the $1.6 limit is that if you saved, possibly by making additional contributions and salary sacrificing into your deferred benefit scheme and invested astutely in your SMSF, you will be punished. Yes I know there have been tax benefits, but the other side of that coin is your money has been locked away for a long time (and invested in the economy).

Is this an unintended consequence of government policy, or a desperate assault on our superannuation savings?

Yes, Jan and I have a high class problem as we have a deferred pension benefit + our SMSF and expect to avoid the pension. But as life goes on, we face increasing anxiety about the management of our nest egg and I deeply suspect in 10-15 years a rapidly decreasing desire to deal with changes we will possibly comprehend less and less. Right now we take the “Self Managed” bit in our SMSF very seriously, but how long can we keep that up? It really should be pretty much a set and forget situation, but continuing legislative changes make that impossible.

The long tail is that due to continuing uncertainty and retrospectivity, people may walk away from superannuation, possibly heading into riskier investment territory (someone will always be out there looking for lost people. Heh, heh, heh!)

As a general proposition, forgetting defined benefits, SMSF’s etc., let me float this with you:

Our super and tax systems are in the emergency ward, being constantly triaged by successive governments (RESPECT for those working in real Emergency Treatment areas!) but not being admitted to hospital! These systems need surgery to deliver certainty, consistency and longevity.

So how about this?

  1. As exists now, Super Guarantee (SG) money paid by your employer, goes tax free into your super account.
  2. Above your SG, you should be able to top-up your superannuation account, but limited to a prescribed amount. This should be a % of your taxable income on a sliding scale, where those on lower incomes may contribute, tax free, a higher % than those on higher incomes. This would enable low earners to make additional payments if they can; but higher income earners automatically would pay what they do now on additional super investments, see below. For contributions above the prescribed threshold (described above), minimal tax would be payable at a rate which provides incentive to those on low incomes.
  3. Once money is within the super fund, it’s growth is Tax Free; providing the incentive to grow as much as possible to minimise the number of retirees going onto aged pensions.
  4. When money leaves the fund, as a pension OR into estates, it will be taxed at standard marginal rates. This would not apply to reversions within the fund to dependents or partner.
  5. These arrangements could be “grandfathered”, but lead to a more stable, better understood system which should have greater longevity.

So I say, simplify the system and stop the band aid approach!

If you want to know what a band aid looks like, check the 5 page ‘Introducing a “$1.6 million transfer balance cap” link below.

See also http://budget.gov.au/2016-17/content/glossies/tax_super/downloads/FS-Super/02-SFS-Retirement_transfer_balance_cap-161209.pdf – 5th page ‘How will this cap apply to defined benefit pensions?’

* If you have a defined benefit pension i.e. guaranteed pensions from a commercial or government fund, you need to check with your fund and seek further professional advice about how your pension will be treated.

Has your financial planning been affected by these changes? Are you generally happy with your superannuation arrangements? Any advice you’d like to share?