Superannuation cuts to fuel the investments in NG property ?

maybe i am quietly selling lvr still at 40% need it down to 30% by next cycle

 

interesting

Recently you've talked about your recent purchases and how you've never sold any ....

So maybe you're changing your mantra

I've always liked to decrease debt and LVR by way of selling when the market gets toppy

Cliff

 

Change is the only constant...you need to move with the market......not selling yet...but the time will come.......perhaps sooner than later. If you don't change the market will change you.

The market is getting toppy in some markets....in others like Sydney...I see parallels to 1987. With the recent interest rate cuts.......I see caution being thrown to the wind.

Its like "Buffalo Soldiers".....he who runs away survives to fight another day!

 

It's a very fair policy, there is no reason that the absurdly wealthy, who are the people who can afford to make non-concessional contributions, should be able to shift millions of their money from higher tax environments into a low to no tax environment. That was probably the single best change they made in the budget, super is supposed to be for retirement not for tax avoidance and wealth protection.

 

Cheers Wogitalia
And I’m sure that’s the same broad-brush logic applied by the bureaucrats who drafted that policy. But I’ll just point out there is a whole bunch of people older than you who have little or no super through circumstances but would like to organise some late in the piece.
In particular there would be many thousands in that 65 – 75 age bracket who might have a total wealth value of between 500k - $1.5m, all held outside of super. Hardly absurdly wealthy, and most would be rock solid citizens who wish to self-fund their retirement with dignity, and not rely on government handouts. Prior to Tuesday they could plot a steady path over say 10 years to shuffle their shares and investment proceeds into the super environment within the prescribed non-concessional annual limits.
With the stroke of a pen this is no longer an option. 500k is all they could do, so a lot won’t even be bothered now.
As mentioned by others they will be mightily cheesed off, and guess which party they used to vote for ?
IMHO there will be a view by many that if $1.6m is a fair line to draw in the sand so as to not rort the system, then why lock this particular group down to a figure much, much less than that ? Could they too not be allowed to climb their way up to that same ‘fair’ cut-off point using their own after-tax dollars for goodness sake, without being labelled as rorters ?

So yes I think many agree that something needed to be done to stop perceived systemic abuse, but they will catch many undeserving small fry with such a restrictive net. Political consequences for sure. Worth a rethink Sco-Mo.

 

...and the RBA gets a new Governor (Phil Lowe) in September. Maybe, his first job is to start pushing up rates??

 

I would imagine there would be a whole stack of people in the 55 to 75 age bracket who don't have much in Super and whose strategy was to rollover the proceeds to their PPOR into Super when they downsized. Can't do that now.

As you state @Foxy *****, they are now limited to $500k each. Way short of those who have already rolled over their funds and could be at $1.6M or higher.

 

That's a valid point . Sometimes details will be tweaked prior to implimentation

But the reality is I can't see labor or the greens fighting the changes as they would probably consider those people wealthy and by Australian standards they still are ....

I'd be planning on putting extra money in super which we still do .

I'm disappointed that they've dropped the annual consessional contribution down to 25 k , but being able to average up to 25k over a five year period will counteract this and be of benifit in particular for people who don't work consistently .

We're selling a property in our super in the new financial year and I was going to go into TRIP ( transition to retirement pension ) to take advantage of the tax free status for the capital gain but now we'll have to pay 15 % tax on that , which is the same as if we were in accumulation phase . Having the extra money coming in from TRIP would be nice , but not essential . It sounds as though the changes will complicate the compliance paperwork and with the decreased ability to put further funds in , it may not be worthwhile going into TRIP at this stage .

Cliff

 

So will you buy up more now and take advantage of potential short term growth over the next few years? Or wait it out and hope for great buying when rates go back up and people offloading investments they can't afford?

You confuse me sometimes with your posts, your buying more, but at the same time deleveraging for the next cycle.

 

They still have concessional contributions of another $250k over that period, so that's 750k they can put across and you're still ignoring the main point, those people still have millions in assets to fund their retirement, they're in no need of tax discounts to fund their retirement, they have more than enough to live very comfortably for the next 30 years.

Even if that 1.5m balance doesn't earn a cent they've got a good 30 years of living on Australia's median household wage and are perfectly entitled to work and continue to top that up if they want to.

Anyone who is impacted by these changes is more than well enough off to handle it and have a very comfortable retirement.

All this does is cap how much the very wealthy in society can use tax avoidance techniques that the majority of Australia will never have access to, it's a very fair change.

 

The reason for this is market dependent.

I plan to manage risk via fixing rates.

I will also get out of some markets. No two markets are the same and there are markets within markets. There is no one single macro view.

 

I think this is a good point you make that sometimes gets overlooked by short-sightedness. The whole debate of fixing vs variable really shifts from being a 'trying to pay less interest', to becoming a risk mitigation issue once a portfolio reaches a certain amount of debt and some certainty is needed to manage A) overall risks, B) stabilise cash flow.

 

You must have made different assumptions to me or you are using a different version of Excel.

If one assumes that CPI remains at 3% for the next 30 years and that Australia's median household income for FY17 is $88,187 (I took the FY14 median household income of $80,704 and increased it by CPI), then my version of Excel calculates that:

1. If a couple in retirement both had Super balances of $1.6M each, then their balances would run our after 24 years.
2. If a couple in retirement only had one person with a Super balances of $1.6M, this balance would run out after 14 years.

To last 30 years, the couple with $1.6M each would need to earn at 2% growth+income. That is, they could just put it in a bank account.

To last 30 years, the couple with only one person having $1.6M would need to earn at 7% growth+income. That is, it is doable but just putting it into a bank account just won't cut it.

But, the big question is: How many couples have $1.6M or even better $3.2M in Super?

According to the most recent Australian Bureau of Statistics (ABS) data, from the 2013/14 financial year and released late last year, the average Super balances by age and gender in the 55-64 age bracket (I used this bracket as they are likely to need their Super for 30 years) is:

• $321,993 for men
• $180,013 for women

That is, $502,006 for an 'average' heterosexual couple (I will let you work it out for the other categories of couples). Even if we assume Super funds grew by 10% in FY15 and FY16, the FY16 Super balance would be around $600,000 for our heterosexual couple.

If their Super fund doesn't earn a cent, it will run out after 6 years, based on the median household income.

To make it last 30 years, it would need to earn over 17% return growth+income. High risk and virtually impossible.

So, the current average Super balances, especially for 55-64 years old is not enough and they don't have much time to get their balances up to a reasonable level.

I suppose there is always the Age Pension and they can become 'a burden on taxpayers in the future'.

 

I used the mean disposable income for all households in Australia ($918 per week or $47,736 per annum) 6523.0 - Household Income and Income Distribution, Australia, 2011-12. This may have increased slightly by 2016 but not to 88k, that's for sure.

If we aren't going to factor in any income growth then it's a bit rich to want to throw inflation in there so no need for excessive complication. Now I rounded it off to $50k for simplicity and to reflect that it has increased since 2012 and used 1.5m as the pension balance, hence the 30 years.

Obviously bringing in income is only going to increase the length they can survive on that balance for. I've also clearly only used a combined pension of 1.5, if both members have 1.5m then that's a 3m balance, which at 50k gives them 60 years, I don't know of anyone who has lived to 135 yet but when they do this couple with their 3m superfund might have issues if it's not generating any income.

It's also worth noting that a couple with two members are going to be able to dump $1,000,000 in non-concessional contributions and a further $500,000 over the 10 years in concessional contributions from the original scenario, so my ultra conservative single member contributing to a single member balance should make it abundantly clear that this couple doesn't need tax payer subsidies to afford a comfortable retirement.
.

What's wrong for that couple? Under the new rules they can contribute 1.5m over the next 10 years to get their SF balance to $2m from the average position which as shown above is comfortably more than enough to have a disposable income above the average level in Australia. This assumes they only work until 65 as well, they're perfectly entitled to make contributions until 75 now under the changes, so that's another 500k they can get in there.

On top of that with the new rules they'll also be able to make top up concessional contributions for years they don't meet the maximum and claim a tax deduction while doing so.

Again, the only people that are impacted by this change are those with very high levels of wealth that want to exploit the superannuation system to avoid tax. If you've got enough money that a $500k cap is stopping you from dumping more money into your superfund then you've got plenty of assets from which to support yourself anyway, paying tax at marginal rates seems perfectly fair in a scenario where you've already got millions in the super fund.

As for the 1.6m cap, that only applies to tax free amounts, the rest of the fund remains in accumulation phase and is only taxed at 15%, making it still a very beneficial income earning environment and as demonstrated above that 1.6m cap per member, so 3.2m cap is above the average household disposable income in Australia without having to earn a cent for 30 years.

These changes are incredibly fair, they are simply a move to stop high wealth individuals using superannuation to avoid tax and contribute more to society.

I say that as someone who was mostly disappointed with the budget but the superannuation changes were pretty damn well thought out and executed to stop the rampant exploitation of superannuation by the wealthy.

 

PS.

I say all that as someone who had/has every intention of being one of those wealthy folk exploiting the superannuation system as much as I can! I'm actually annoyed the deductions rule doesn't kick in until 2017 as I would have happily exploited it this year if it had!

 

Personally, I believe we would better of using the ASFA Retirement Standard:
ASFA Retirement Standard - ASFA

This standard states that the current annual budget needed by Australians to fund a comfortable standard of living is $59,236 per retired couple. This budget assumes the couple is aged around 65, own their own home outright and are relatively healthy. If the couple are renting or have health issues, obviously they will need more. Based on this, $88K might be a bit high but $48K is way too low.

You were the one who didn't factor in any income growth. I mentioned income+growth multiple times. Obviously one has to factor in CPI and income+growth because, with 3% CPI, the budget to fund a comfortable standard of living goes from $59,236 now to $139,594 in 30 years times. It doesn't make sense for me to round the current number to $60K and multiplying it by 30 years. Your $50K becomes $118K in 30 years.

As I have shown above, 135 years is just nonsense.

How many average Australian couple do you see dumping an extra $1.5M into super in the next 10 years or $150,000 per year (that is nearly twice the median household income).

... and you see the average Australian couple doing this? Wow!!!

I feel you have made a whole bunch of assumptions here.

We will have to agree to disagree here.

 

It was a simple equation to show the position based on the original comment. it wasn't meant to be a complex representation. Again, if you want to bring CPI into play then the average growth should be somewhere in the range of 3x that based on history so again, that balance will grow significantly beyond that and they will die with more in that fund than they started with at retirement, even at a very conservative 5% growth and taking your original 88k with 3% inflation that $3.2m balance will be $5.5m in 30 years time.

The simple fact is that a couple with $3.2m in their superfund are going to have a very comfortable retirement and unless they spend in excess are going to die with more wealth than when they retire.

If you can't see the average Australian couple doing it then you've literally just agreed that these changes only impact the wealthy who want to use superannuation to avoid paying tax. Literally agreeing with my original point so I'm not even sure what you're trying to say?

Think about it, if the change doesn't stop the average Australian couple from achieving freedom in retirement because they don't have the financial means to exploit the system then how are they impacted by changes that are only aimed at people who want to make non-concessional contributions above $500,000 or who already have a superannuation balance of $1,600,000 per member and want everything above that amount to be tax free as well.

No I haven't, you've even agreed that the changes don't impact the average Australian couple because the average Australian couple can't afford to exploit the previous rules anyway.

Again, the only people impacted by the proposed changes negatively are those who wish to put in more than $500,000 in non-concessional contributions, ie. people with more than $500,000 in assets lying around that they want to move into a preferred tax environment and people with pension balances in excess of $1,600,000.

Everyone else is actually going to benefit from these changes, those not hoping to make more than $500,000 in non-concessional contributions aren't impacted at all, nothing has changed except that there will no longer be an annual cap so they're actually going to find any non-concessional contribution easier to make. Those with funds under $500k are able to make deductible top up contributions, a massive win for them (these are the average folk you mention) and everyone is able to make tax deductible contributions without requiring salary sacrifice or passing stringent requirements on income sources.

 

I want to point out that a couple grossing $88k before tax would spend some of that income on tax, and typically wouldn't think to put that money into salary sacrifice or titr. Therefore once retired (not paying income tax on a salary) they will automatically require a lower amount to keep up the exact same living standard. That is where the"comfortable" standard comes from, put out by the Superannuation industry.

 

To people who think that reaching $1m in super is easy it is not...even for someone on a high income with no voluntary contributions

Let say in the first 10 years of working you contribute on average 8k per annum that is 80k
Next 15 years lets say the average is is 12k annum or a total $180k
Next 15 years lets say the average is 15k per annum or a total of 225k

So you can see that $500k limit is just barely reached...obviously if you also contribute on top then you will exceed it.

You need to contribute almost the maximum over 40 years to well over $1.6

 

With 1.6M in super you can retire comfortably for ever… if you don’t die beforehand of course ! Assuming a moderate 4% yield the income produced will be more than enough to live on, leaving all your assets intact and possibly growing.

Over 1.6M and it’s clearly the domain of wealth creation and estate planning, not what super is supposed to do. Like wogitalia I find these measures rather fair.

To achieve ASFA comfortable retirement and assuming you only use the income from it, a single would need around 1M and a couple around 1.5M. However if you plan to use up all your super when you die, according to ASIC’s retirement calculator, a single would only need around 750K and a couple 950K.

You haven’t considered organic growth and compounding. Over several decades this will be worth several times your original contributions.