Scott Morrison ready to rewrite superannuation rules

Scott Morrison is planning key changes to super: here’s what is likely to happen.

If you are in investor, the elevation of Scott Morrison to Treasurer is about to become highly relevant to your superannuation plans. The Treasurer with the backing of the PM is readying the public for changes to super and already he has given very strong signals on what he wants to do.

Virtually everything the Treasurer has mentioned on radio and elsewhere concerns savers in the accumulation phase — in other words, people who are saving to retire but have not yet done so. There will be good news and bad news for this group.

If the Treasurer is planning any changes, it is unlikely to affect those over 65 — and though there is nothing sacrosanct about tax-free pension status, it is most unlikely that Morrison will rock that boat.

Most likely, whatever else happens within the exercise, Morrison will almost certainly take privileges away from one group (those transitioning to retirement) and improve conditions for a different group (those who miss years of superannuation contributions through mat­ernity leave or unemployment).

Here’s the likely scenario:

1. Superannuation “TRPs” get squeezed.

This is the transition to retirement income system where savers over a certain age — currently 55 — can keep contributing to super and draw off some of their superannuation pension at the same time.

The TRP is very popular with investors who fully understand the system. It was designed to help people transition to retirement. The problem now is that, after a decade of the program, most people most of the time simply access the TRP system to get a tax break. Financial planner Bruce Brammall says: “This scheme was brought in with the best of intentions by the Howard government. Today most people use it to get their tax down, simple as that.”

TRPs work like this: if you are, say, 60 and still working, you can start a pension and draw a tax-free income from that pension, and with that money saved (that you might have once paid in tax) you can top up your super contributions through tax-advantaged salary sacrifice.

Looking at it rationally, anyone who understands it would do it … but the original idea was to ease the path towards “winding down” towards retirement. It is clear that this original policy ambition has been lost.

The most likely scenario here is that the scheme could be phased out or at the very least the age you can start your TRP is lifted much higher — perhaps you will need to be over 60 to start a plan. In common with any initiative of this sort, any changes will be “grandfathered”; that is, phased in over a long period of time.

2. Concessional caps get lifted.

Just now you can put in up to $30,000 extra into super on a 15 per cent “concessional” tax rate if you are under 50, if you are over 50 you can put in $35,000.

There is intense speculation that Morrison will change the rules on concession caps for those who miss years at work — such as working mothers or people who have erratic employment histories.

Research published by Eureka Report earlier this week showed that if you miss time periods of super contribution, the length of time it takes to “make up” is longer than most people realise. For example, if you miss two years of super contributions it will take 2.5 years of making double your historic average level of contribution — because you miss both contributing and the compounding effect of time in the market. (See the table.)

Morrison has specifically mentioned that this aspect of the system is unfair. The notion of a lifetime concessional cap may be introduced here to make it a fairer system.

Separately, there is the whole area of non-concessional caps where you can still contribute very large amounts of money into super without a tax break upfront on your contributions — how the Treasurer may deal with this is difficult to judge.

Overall, these expected changes are arguably good for the system. The TRP scheme is not used for its original intention: indeed at its most extreme it is known there are remarkable innovations going on where, for example, a family of four might have a DIY fund with adult children old enough to top up the fund using the TRP scheme and in so doing top up the overall family’s wealth. This is all very smart but far away from what former treasurer Peter Costello had in mind once upon a time.

By the same measure, the imposition of concessional caps on people who manage to return to work is most unfair: At its worst, it means the current system blocks these people from catching up on their super.

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