Last week share markets around the world fell. At its lowest point the Dow Jones Industrial Average was down 1579 points, a fall of 6.4 per cent. This one-day fall wiped off more than all the gains made since the beginning of 2018. The Australian share market, unsurprisingly, followed suit having its worst week in 2 years.
The down-to-the-wire Australian Federal Election result indicates a disparity between the policies of the major parties and the needs and wants of the people. Superannuation alone provides a clear example. Superannuation has been seen as a safe haven for working Australians saving for their retirement. In the past, political parties have encouraged and incentivised Australians to save for their retirement in order to lessen the burden on the welfare system. However, before this election both major parties indicated that this is about to change.
With it now clear that the Coalition will form government it is important we take closer look at superannuation reforms they propose:
- 15% tax on earnings from any withdrawal from superannuation for those aged between 55 and 64, also known as the transition to retirement phase. Previously they have been able to withdraw tax free money from their superannuation.
- A $500,000 lifetime cap on the amount of money you can add to your superannuation outside of salary sacrifice. Previously this was capped at $180,000 per year, with no lifetime cap. The 15% tax rate will continue as is for these earnings. This initiative will not be retrospective so those who already have $500,000 in their super funds will not be disadvantaged.
- Increasing the superannuation contribution tax rate from 15% to 30% for those who earn over $250,000.
- For those who have over $1.6 million in their superannuation account, they will have to pay 15% tax on any money over this amount.
- Salary sacrifice will be reduced to $25,000 per year for everyone.
The Coalition has claimed that only 4% of superannuation account holders will be affected by these changes. However, at the most basic level, these changes could see the long term effect of putting more Australians on the Government supported aged pension. It is likely that Australians could come to the opinion that, if parties on both sides of the fence are willing to change long standing rules and levy higher taxes on superannuation, then super is no longer a safe investment they once thought it was. The group most likely to be disadvantaged by the proposed changes are those who are planning on retiring in the next few years. These changes could prevent them from boosting their superannuation in their last few years of work with large deposits.
Exit polls from the election showed that super was an important issue for Australians with 38% of Labor supporters and 36% Coalition supporters ranking its importance as high. It is no wonder this is a concern to more than just the 4% of account holders it is meant to affect. According to MLC White Paper, 43% of Australians do not believe they will be able to fund their post work lives. It is projected that a lump sum of $640,000 will be required to support a comfortable lifestyle for a couple. These changes in policy could see more people falling short of this mark.
As both parties had similar proposed policies it is possible that the changes proposed could be passed with Labor’s support. However the unpredictable senate could help provide some protection from these changes. It is therefore important that before you launch into changing your strategy, you are mindful these are not yet set in stone.
The proposals seemingly act as a disincentive to save for our own retirement. This could see an increase in pressure on the aged pension; the very opposite of what superannuation was designed to do. The fact that both parties are contemplating superannuation changes does, however, clearly reiterate that it is never too early to start planning for your retirement. Going without now could mean a better lifestyle in the future.
The information (including taxation) in this article does not consider your personal circumstances and is of a general nature only – unless otherwise stated. You should not act on the information provided without first obtaining professional advice specific to your circumstances.
Post Series: 2016 Election
- 1.What Does The Election Result Mean For The Economy?
- 2.What The Election Result Means For Your Superannuation