Coalition’s changes to superannuation are seven deadly sins

A list of fatal flaws are being pointed out by everyone from wealth managers to backbenchers.

The Coalition’s changes to superannuation appear worse with each passing day as everyone from wealth managers to backbenchers points to flaws in the proposals that are due to take effect on July 1 next year. Worse still, senior politicians are struggling — sometimes publicly — to understand, never mind explain, the changes.

So far industry attention has ­focused on the mechanical problems presented but the policy sins run deeper than simply logistics. They have more to do with disturbing confidence in the system and inadvertently target older and lower-income groups in a system that was supposed to unleash the ability to DIY.

With only four weeks left to election day the Coalition must now actively consider the risk of going to the polls with a flawed superannuation plan.

Here’s the seven sins:

1. The $1.6m cap distorts investment behaviour

In placing a $1.6m cap on the amount with which you can fund a pension, the government put a lid on abuse of super, but the idea that this amount must work “forever” is deeply flawed. Since you cannot “top up” the amount, it means people who take no risk will have ­returns close to cash rates, which are utterly hopeless at present. Worst of all, the $1.6m cap ignores longevity risk — it means very old investors are expected to be as alert in their later years as they were when they started a pension.

2. The neutering of Transition To Retirement Pensions hit the weakest

The TRP plans — where you tap into a tax-free pension income and contribute back into super during pre-retirement years — were actually most beneficial to those who needed to top up relatively modest amounts of super.

It means someone on, say, $100,000 a year could get relatively significant amounts into super. Indeed the concessional caps that were in place ensured the system was not much use to multi-millionaires. Under the new scheme, the TRP will have greatly reduced benefits, yet the issue of people “transitioning to retirement” remains just as important as it did before the budget. (See Glenda Korporaal’s feature below).

3. The $1.6m cap is anti-property

This is one aspect of the super ­reforms that the Coalition has clearly underestimated. The problem with property is that it’s what they call “lumpy” … in other words an investment unit worth $400,000 can only be sold for that amount or not sold at all. This lumpy nature of property as an asset — its inherent illiquidity — means investors often with one ­investment property that is effectively their nest egg will face a terrible dilemma: whether to put it into the $1.6m pension fund ­account or not. If they don’t, they may make a long-term strategic error; if they do, it might minimise their pension income. Either way it’s a problem because with lump assets you will undershoot or overshoot the “cap”.

4. The flat $25,000 pre-tax cap targets the 50-plus age group hardest

Remarkably it was the Coalition under Treasurer Joe Hockey that allowed for the realities of demographics in its 2015 budget when he let older people put more into super on a concessional basis than younger people. If you were over 50 it was $35,000 and if you were under 50 it was $30,000. In ­introducing a flat cap for all ages, Scott Morrison ignores previous policy from his own government. In doing so, he inadvertently targets the over-50s, It’s not rocket science; it’s only when you’ve paid off the mortgage and the kids cost less — but before you retire (age 55-65) — that most people get any chance to put money into super.

5. The retrospective $500,000 lifetime cap also hits the 55-65 age group hardest

Separate to the debate over whether the lifetime cap is retrospective (of course it is), the creation of a $500,000 non-concessional (pre-tax) cap for super contributions is a crude ­instrument and again hits the 55-65 age group hardest — ­especially those who actually had a plan to tip in the key funds close to retirement. Typically these ­investors had their money in property or bonds or other long term investments — with a lifetime cap that starts just as the market began a very long bear market from 2007-2010, retiring successfully has become much harder.

6 The post-tax lifetime cap at $500,000 is too low

It sounds like a lot, but $500,000 at today’s rate in cash deposits gets you perhaps $13,250 a year. Some will say it’s an extreme example, but it’s a live example on what the maximum lifetime contribution total would get you from today’s ­deposit rates. In other words, the clear danger is the lifetime cap is so low it will discourage people from trying to finance their own retirement.

7 The number of people hit by the changes is higher than we were told

Why on earth did the government insist only 4 per cent of the 14 million people in the super system would be hit? The number was ­always going to be higher. Now ­actuaries Rice Warner has put its name to a report that says the wider changes hit twice as many — 9 per cent — and specific changes such as the TRP changes hit five times more than the government had incited — that’s 580,000 instead of the government’s stated number of 115,000. No wonder there is trouble.