In his latest report, Rethinking Super Tax Concessions, David Knox, senior partner at Mercer Australia, made several recommendations regarding superannuation reforms including that there should be an increase of two percentage points in the current minimum drawdown rates for pension products during retirement.
Mr Knox said the government’s draft objective for superannuation proposes support should be carried out in “an equitable and sustainable way” and believes this is not achievable under the current regime.
“In addition, the associated Treasury Consultation paper suggests that the system should be cost-effective for taxpayers,” he stated.
“The general direction of commentary suggests that the current tax arrangements for superannuation are unfair and/or unsustainable.”
The report aims to assess the long-term financial benefits of tax concessions following public debate about the generosity they allegedly provide for higher-income earners.
It stated the current super system and tax concessions can, and should, be improved to make it more equitable and ensure everybody receives value from concessions.
“This paper takes a longer-term view and shows that for median and average income earners, the cost of the super tax concessions is actually less than the future saving in age pension costs arising from superannuation,” Mr Knox said.
Mr Knox stated the existing drawdown rates don’t deliver the best outcomes for many retirees, particularly those on median and average incomes.
“Indeed, the Retirement Income Review adopted a drawdown rate of 10 per cent at age 67 for the 50th income percentile, which is double the minimum drawdown rate at that age,” he stated.
“It is therefore recommended that the current minimum drawdown rates be increased by two percentage points to increase the level of drawdown during retirement.
“Although this increase may not be needed for those with significant balances, the requirement for them to increase their withdrawals will also reduce the value of their super tax concessions.”
Another recommendation from the report is to reduce the threshold for the Division 293 tax from $250,000 to $225,000, or 20 per cent above the top marginal income tax rate.
Mr Knox said this would mean most individuals subject to the top marginal tax rate would pay 30 per cent tax on their concessional contributions.
He also supported the additional tax on investment earnings for balances above $3 million.
“This cap should always be greater than or equal to the indexed transfer balance cap,” he said.
“These changes will reduce the level of the super tax concessions received by those with significant superannuation balances whilst at the same time retaining some concessions for the valid reasons outlined earlier.”
Finally, Mr Knox suggested the government halve the current non-concessional contribution cap or introduce a lifetime cap for non-concessional contributions which would restrict the excessive use of superannuation as a savings vehicle.
“The current concessional contribution cap should be maintained, as it should be no less than the required SG contribution rate of the maximum super contribution base,” he said.
“The annual base for 2023–24 is $249,080. This is equivalent to an annual contribution of $27,399 using the required SG rate of 11 per cent for 2023–24.”
David
The current law does not require over 65 to compulsory commence a pension and many do not for a simple reason of not depleting their retirement pool. By increasing withdrawals and paying tax on income on capital outside with tax free threshold and SATO etc will require modelling. A flat rate of 15% would be simpler.
I don’t understand why we should change something when it is not broken
Totally agree Patrick. Short term thinking for years of bad government decisions is no way to fix the system, especially with a multi – decade view.
We have capped pensions, we have excess tax proposals, we have death benefits tax.
Plenty of people may sell an investment property, or not qualify for small business CGT concessions. Reducing NCC’s when we already have a TBC that stops them well before $3m makes absolutely no sense is a daft idea at best and this is me being nice!!
If they keep going Australians will start to lose confidence in the system which is a disaster for the country. I can certainly vouch some have already abandoned super as an option, or at least treat it as a necessary evil.
If you want to massively accelerate costs of aged pensions, health care and aged care we should take Mr Knox’s advice.
Given increasing longevity the object of this would be to ensure that elderly Australians run out of money and eek out their final years on the Aged Pension. Given current budget mess, how will the increasing cost of aged pensions then be funded?