Money | Retirement income systems languish in the too-hard basket

The Australian retirement income system languishes in the government too-hard basket. Picture: Shutterstock.
The Australian retirement income system languishes in the government too-hard basket. Picture: Shutterstock.

Last week the Australian Government Treasury released the latest review of the Australian Retirement Income system.

What made this one unusual is that it made no recommendations - it just provided information. But don't hold your breath, without doubt it will go the way of all the other inquiries.

Remember the Henry tax review, which was commissioned by the Rudd government in 2008, and published in 2010. The report contained 138 recommendations, most of which have been ignored.

In 2014 we had the 320 page Murray report, which made 44 recommendations, most of which never saw the light of day.

In 2015 CEDA published a comprehensive paper "The Super Challenge of Retirement Income Policy", which pointed out that "constant tinkering around retirement income policies makes it difficult for those planning for retirement to make informed decisions about how best to fund their retirement."

Of course, if you're in government you need to be seen to be doing something.

In December 2016 the treasury released a discussion paper titled Development of the Framework for Comprehensive Income Products for Retirement (CIPRs), which required fund managers to develop products which would give retirees security in the later years of their life.

The May 2018 budget took the process a step further when they announced a retirement income covenant that would require trustees of superannuation funds to offer CIPRs.

As of today, they are still a work in progress.

Just last Thursday Reserve Bank Governor Phillip Lowe urged the Morrison government to move faster on reform, and pointed out that the Productivity Commission's Shifting The Dial report has been languishing in the government is too-hard basket for over three years.

A key finding of the latest retirement income enquiry was that the present retirement income system, which revolves around the three pillars of age pension, compulsory superannuation, and voluntary savings was serving retirees well.

Consequently, there was no urgent need to increase compulsory employer superannuation.

Predictably, reaction by the many stakeholders in our retirement system were mixed as they all fought to defend their own positions.

The Association of Superannuation Funds of Australia (ASFA) strongly disagreed with the inference that raising the employer superannuation to 12 per cent was not of great importance.

CEO Martin Fahey claimed "for many Australians the increase to 12 per cent is essential to offset the financial loss from super withdrawn under the Covid 19 early release scheme"

The big debate now is between more employer super, or more money in the pay packet. Valid arguments can be made for both positions, but in my view, most workers spend every dollar they earn, and would be far better off trading smaller pay rises today, for $800,000 or more in their superannuation when they retire. That would give every retiree the equivalent of a big Lotto win.

The main problem with the review is the assumption that our present pension system can continue at its present generous level.

Let's face it, we have a major structural demographic problem. Our fastest growing group is the over 65s, who demand more and more in welfare as they age, yet thanks to a wide range of offsets they pay little or no income tax.

Australia, like every other developed nation is in debt to the hilt thanks to Covid. The big question is where will the money to pay all this welfare come from.

Raising the GST to 15 per cent with no exceptions is the obvious answer - how to sell that to parliament is the big question.

Noel answers your money questions

Question:

My wife is 63, I am 70. We have super $850,000 each in pension phase. We have arranged with the fund for the pension of a deceased partner to continue to be paid to the survivor.

Does the deceased partner's account continue, and so pay a minimum pension based on the deceased partner's age, or are the two accounts merged into the survivor's account with a minimum pension dependent on the survivor's age?

Does the transfer balance Cap of $1.6 million apply only to the amounts originally contributed to both pensions (or is the cap for this purpose the total value at the time of death in both accounts? What happens to the accumulation account balance (if my wife was to die first)?

Answer:

Cosette Woolley of Superannuation Services says that in the year of death the minimum is the deceased's minimum. In subsequent years it would be the surviving member's minimum.

The deceased member's balance is transferred into the survivor's name as soon as practicable. This would be into a separate pension account as the current pension cannot be added to.

The transfer balance cap of $1.6m is the amount of the original pension if started after 30 June 2017 or the balance as at June 30, 2017 plus the value of the deceased's balance.

The arrangements you have made for the pension to the survivor will determine the value that is recorded against the survivor's Transfer Balance Account (TBA). If the pension has been set up as a reversionary pension to the survivor then it is the value at death but is not recorded against the TBA for 12 months from the date of death.

If it was a nomination by the member for the survivor to receive a pension and not part of the terms and conditions of the pension, then it is the value when the transfer to the survivor occurs and immediately is recorded against the survivor's TBA.

If the TBA was to surpass the $1.6m cap, the surviving member could commute some of their existing pension to maximise the amount in super.

Question: 

My wife and I propose giving each of our two adult daughters a cash gift of $100,000, and would like to know of any tax implications for them, or for us.

The ATO website seems to indicate that gifts may be taxable if they are large amounts.

Answer:

My accountant advises that a gift from parents to children out of natural love will not normally meet the criteria for taxable gifts according to ordinary concepts.

The ATO website is probably referring to artificial situations where a person may make a substantial gift in lieu of a contracted payment that would be liable for tax in the hands of the recipient.

Question:

Can you please explain the lifetime contribution cap for residential aged care.

Is it true once that cap is reached ($67,000) the aged care resident doesn't have to contribute any longer?

Answer: 

The lifetime contribution applies to the means-tested care fee, once reached the resident still pays the basic daily fee and their accommodation cost. It also includes any amount paid as an income tested care fee in home care.

  • Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. noel@noelwhittaker.com.au