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More research points to flaws in proposed caps
One industry lobby group has pointed to further research that indicates that younger superannuants under the proposed contribution caps will struggle to get their funds even close to $1.6 million, irrespective of their earning capacity.
The SMSF Owners’ Alliance said a report by the former head of the School of Economics at UNSW, Dr Ron Bewley, indicates that unless a superannuation member contributes the maximum $25,000 contribution cap every year of their working life, they are unlikely to ever a achieve a balance of $1.6 million in super.
According to Dr Bewley, a superannuant contributing $25,000 each year over a continuous 38-year accumulation phase into a capital stable fund are likely to only end up with $1,485,956 at the end.
“How many people even with great prospects can put aside $25,000 per annum from their income when they have possibly just left home, are paying HECS off, are saving for and buying a home, having kids, etc?” he said.
Over a 20-year period, if the super member invested $25,000 each year but used their non-concessional cap of $500,000 in year one and invested into a balanced fund, they would still only have a 50 per cent change of achieving a balance above $1.6 million, he said.
"Most people will not be able save the $1.6 million cap in super, however much they earn, unless they can contribute the annual caps for around 38 years," he said.
Under the new super proposals, private sector workers whose super savings are exposed to market and longevity risk, he said, are severely disadvantaged compared to public sector employees, including politicians, on defined benefit schemes that are guaranteed by the government.
"The contribution caps are obviously far too low for most people to reach an amount needed to compete with the ‘four times Aged Pension’ or politicians’ $100,000 defined- benefits pension," said Dr Bewley.
Miranda Brownlee
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.
Good points Andrew. The only thing that should change with these Budget proposals around super should be the $500K non-concessional cap. It should remove the backdated nature of the measure and simply start from say 1st July 2016. No need to be fluffing around with exemptions for this or that. Make it simple, make it clean and move on.
Since tax-free super after 60 was introduced, I've been telling my clients things will change and don't be surprised when they do. Prior to the changes coming in a decade ago, everyone's earnings on their super was tax-free in the pension phase and most people could draw a decent pension at a level where no personal tax was paid. So no changes for the majority. It was only those people with significant balances that were positively impacted by the changes. It was a boon for them. No the poor dears will have to get by with a maximum of $1.6M each, and a total of $3.2M combined, be they so lucky, before they have to pay any tax. Is it really unfair, unjust, inequitable or a breach of faith for these people who may have more than these limits to pay a maximum of 15% on the earnings of their super balances above the $1.6M / $3.2M caps?
If any one saw the stupid article on 60Minutes a week or so ago, one would think that the system has changed for everyone. That all taxpayers will be affected by these changes. Ross Greenwood is obviously angling for a job on ACA because he seemed like he was going after a dodgy tradie rather than actually acting like a financial journalist who knows what he's talking about...0- These changes aren't preventing people from saving for their retirement, they are simply putting limits on the tax break you can get once your nest egg is over a balance that is but a distant speck in the horizon for 99% of the population.Although the caps will make it difficult for anyone starting work now to make total contributions of more than $1.6m into super over their working lifetime, the bigger obstacle for most people will be earning enough to even get close to that amount in the first place, with or without the caps.Furthermore, absent from this discussion is that the budget will also introduce 'allowing the rollover of unused concessional caps so that those with interrupted work arrangements and low superannuation balances can make ‘catch up’ superannuation contributions'. So, according to this, if a person doesn't use $20,000 of their cap in one year, then they can rollover this amount to a later year, essentially making the cap in the later year $45,000 ($25,000 cap plus their rolled over $20,000). In practice, it would seem that this increases how much anyone can concessionally contribute to super before tax over their lifetime (a good thing, surely!), because a cap that isn't used earlier in life can be used later, if that person is lucky enough to have more than $25,000 spare for super, which again, might be a dream for lots of people.Also, is is misleading to describe it as a "$1.6 million cap in super", because it implies a cap on the total balance, which it is not. It is a $1.6m cap on rollovers to the tax-free pension phase, any amount over the $1.6m can stay simply stay in super in the accumulation phase where it will be taxed.The first rule of investing is understand what your investing in, and yet, Australians are have no choice about investing in super, which apparently may legislators and financial professionals don't understand. The government and the financial industry need to to lift the bar on understanding and explaining super and its existing or proposed rules clearly. If they can't understand it, what hope is there for ordinary people?Perhaps Dr Bewley and the SMSFOA need to spend more time reading the <a href="budget.gov.au" rel="nofollow">budget.gov.au</a> website beyond the press release on the front page (if they even read that much). The quote about rolling over unused concessional caps is from page one of this document: <a href="budget.gov.au/2016-17/content/glossies/t...rrative_combined.pdf" rel="nofollow">budget.gov.au/2016-17/c...</a>0
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