Superannuation has been in the spotlight in Parliament as the Your Future, Your Super legislation was finally passed.
Predictably, much of the important stuff was lost in the theatrics that go on in Parliament, but believe me, this is an important moment in Australia’s superannuation journey.
There are three indisputable facts about our superannuation system.
First, as the Cooper enquiry pointed out a decade ago, the average Australian is disengaged with their super; second, superannuation will be the major resource for retirees of the future, as the system matures; and third, the amount you have when you retire will depend mainly on the rate of return your fund can achieve.
A person who starts work now, at age 21 on $ 25,000 a year, may have $ 2.9 million in superannuation at 65 if their fund earns an average of 9 per cent a year after fees and their income increases by 4 per cent per annum. If their fund earned only 5 per cent, their superannuation would be just $ 723,000. That’s a difference of over $ 2 million.
There are two major reforms. The first is to staple an employee to their existing fund until they choose to change. This means that if they change jobs, the new employer is compelled to contribute to the existing fund, unless the employee opts to move to another fund, which could be the standard fund offered by the employer, or any other fund of the employee’s choice.
Critics of the changes claim that employees will now be tied to their superannuation funds for life – that is nonsense.
Given that an employee can move funds whenever they wish, it would be hoped that they would become far more engaged in their superannuation, and get enough information to make a considered decision as to whether they should stay in the existing fund or move to another fund.
But engagement goes far beyond that. The majority of workers hold insurance in their superannuation. If you move funds, the insurance does not automatically go with you – you need to make a fresh application to the fund you intend to join.
Suppose you suffered a medical event, such as cancer or heart attack, while you are with your present employer, and then you wished to move to a new fund. You may well find yourself in a position where insurance in the new fund is refused, or the premiums are loaded.
An engaged person may well decide that the best course of action is to stay with their present fund, even if it’s performing poorly, just for the insurance. Then they may inform their new employer, via choice of fund, to pay compulsory super contributions to a different and better performing fund.
Second, there will be a mechanism where all super funds are rated, and the bad performing funds will be put on notice to lift their game. If their performance does not improve a notice must be sent to their members advising them that this may not be the best fund for them to be in.
While this may be fine in theory, it’s extremely difficult to achieve in practice, because you may fall into the trap of comparing apples to oranges.
There is a much better approach. Every fund should have a benchmark, which considers how much risk they are prepared to take when investing, and expected performance over time.
For example, it may be the benchmark for our balanced fund is inflation plus 4 per cent over the cycle chosen (eg five to seven years). Instead of measuring numbers, the trustees of the fund should be held to account on the basis of how well they have performed in line with their benchmark.
The new legislation is a wake up call to get engaged with your super. Disengagement could cost you hundreds of thousands of dollars in low returns over the long haul, or even the loss of valuable life insurance.
Noel answers your money questions
We are self funded retirees but pay no tax as I earned $ 17,000 last year and my wife earned $ 30,000. We have an investment property that contributes to our annual income. We bought the property new in 2000 for $ 150,000. It’s estimated value is $ 700,000. We are contemplating selling it and buying a property closer to the CBD. What would be the approximate CGT on this sale.
You first need to work out what is the base cost of the property which includes all acquisition costs and any improvements made to date.
If we assume that the base cost is $ 200,000, and the net sale price is $ 680,000, the taxable capital gain will be $ 480,000. As you have held the property for over a year you are entitled to the 50 per cent discount which reduces the gain to $ 240,000.
As the property is owned in equal shares you would both have to add $ 120,000 to your income in the financial year the sales contract is signed.
Make sure you involve your accountant every step of the way. Depending on your personal circumstances it may be possible to make a concessional contribution to superannuation which may reduce the capital gains tax somewhat.
My wife age 63 ceased work with her main employer in February. She has a second relief job but has only worked 10 hours in the past four months, so it is very minimal work.
The super she has accumulated is under $ 100,000 so she is looking at withdrawing all of it and depositing it into a term deposit. Would this have any effect on my part age pension or her Tax. Our assets are not even close to cuts offs points.
There would be no implications from a tax or Centrelink aspect. However, the bigger question is whether she is better to leave it inside superannuation where it should be earning at least 5 per cent per annum after all costs, and where she can draw from it as she needs.
Once it’s moved to a term deposit the earnings will be much less, and history tells us it will be more tempting to take out small amounts until it’s all used up.
My wife aged 63 made a non-concessional contribution of $ 300,000 to her super on 14/05/2021. Based on her low total balance of super, she is entitled to a maximum non-concessional contribution of $ 300,000 by applying the bring forward rule.
Can she make a further $ 100,000 non-concessional on 01/07/2023 (which is after my wife turns 65 and after the expiry of the bring forward rule)?
Yes a further $ 100,000 can be made, based on current legislation, in the 2023/24 financial year if two requirements are fulfilled. She must be under the age of 67 when the contribution is made, and her balance as at 30/06/2023 must less than $ 1.7m
There are proposals to change the age limit to 75 plus further indexation for the contribution threshold limit. This may be applicable by 2023/24 financial year. Watch this space.
I have an account-based pension with Hostplus but don’t need to draw down from it as I have other income sources. However, I am aware that a minimum amount must be withdrawn each financial year. I’m 71 so that’s 3 per cent this year. I had scheduled my annual minimum withdrawal $ 19,000 for next month as I wanted to leave the funds in the account for as long as possible.
Last month I had an urgent need for some additional funds so made a one-off $ 20,000 withdrawal from the Hostplus account. Then I tried to cancel the annual withdrawal scheduled for next month as I don’t need it and believed I had already exceeded the minimum legislative withdrawal amount. However, when I tried to do this Hostplus advised this is not possible, I had to still make the annual minimum withdrawal.
They told me there are two different processes and only the scheduled withdrawals are included in the annual legislated count. Is this correct? I would have thought it didn’t matter how you took the money out, as long as you withdrew the minimum amount you have complied with the legislation.
The fund has a real time obligation to report withdrawal of benefits to the ATO. The purpose of this is to enable them to keep track of the balance cap and it is essential to them that they know at the time of withdrawal whether a payment is a lump sum or a pension payment. Unfortunately, that means that it has already been notified to the ATO.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: firstname.lastname@example.org