Raising the pension age is no reason to panic

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The raising of the pension age to 70 has caused quite a stir, indeed outrage, amongst working Australians. Is it really as bad as everyone is saying or are some important points being missed in this debate?

Just to be clear, I am not defending the Government or the Budget,  nor making a political statement, nor providing an opinion on policy. I am merely discussing how to work within a proposed framework.

Pension age set to go to 67

The age pension age is already legislated to increase to 67 over the next 10 years for those born after 1 January 1957, so if you are currently 57 or under, your pension age is 67 – that’s a fact.

Under the new proposal , those aged between 49 and 56 will see their pension age lifted to somewhere between 67.5 and 69.5 years of age, and it is anyone currently 48 or under who will cop the full three year increase in their pension age to 70.

Let me focus on this group. The oldest of this age range, the 48-year-olds, have 22 years until they turn 70. That’s 22 years to plan for this extra three years they will have to wait for their age pension.

A 48-year-old who has been working since, say, age 18 joined the workforce in 1984. Two years later in 1986, new industrial awards were established by the National Wage Case resulting in superannuation coverage for public sector employees of around 79%, and 68% for private sector employees by 1991. Then, in July 1992, in came the Superannuation Guarantee (SG) forcing employers to make super contributions on behalf of their employees, or pay a penalty.

Granted, it took 10 years for the contribution rate to move from an inadequate 3% to a better 9%, but suffice to say that most ‘employees’ currently in their 40s have been beneficiaries of the SG system for a large chunk of their working lives. Employees currently in their 30s have almost certainly been in receipt of some superannuation support all their working lives. And the 20-somethings – they’ve been getting the full 9% since the day they started work.

Point being, many 48-year-olds in the workforce today will, at the age of 67, have superannuation savings that has been accumulating for over 40 years. They are not like the 70-year-olds of today who haven’t had many years to benefit from the compulsory super system.

It’s your money, take charge

For those who do fall under the SG system, this Budget was a wakeup call; it’s time to stop ignoring your super and get interested in it. You have 22 or more years to turbo-charge your superannuation so that it can fund that extra three years before the age pension kicks in.

What do you need to do? Here’s a start:

  1. Research or get advice to find the super fund that is best for you, taking into account investment options, fees and charges, insurance options and costs. You have the right to choose which fund your superannuation goes into.
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  2. Find any lost accounts, there are websites that assist with this. Once they have been found, claim it back and roll it into your fund of choice.
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  3. Amalgamate all your small accounts into one fund of choice.
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  4. Seek advice on appropriate asset allocation for your age and goals. Are you happy to outsource all investment decisions to fund managers, or do you prefer more control or to know exactly where your money is invested thus focussing on direct share investment? It is your money and you do have the choice.
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  5. Educate yourself.
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  6. Explore the possibility of salary sacrifice strategies with your adviser or accountant.

Superannuation, for many Australians under the age of 50, is likely to be their biggest pool of wealth other than their home by the time they retire and yet it still receives little attention.

Of course, there are many who are not covered by the SG system – self-employed people (sole traders, some contactors, partners in partnerships), those unable to work due to disability, illness or family commitments and the unemployed to name a few.

The superannuation system includes incentives for the self-employed to contribute by way of tax concessions. Some do, some don’t. Some put all profits and excess cash back into the business, effectively building an asset that becomes their retirement fund. For those self-employed who do not do anything to plan for their retirement, this Budget might be a reason to start thinking about it.

However, for those who are just unable to work or contribute to super for whatever reason, it is true this feels like a tough Budget. They will either be forced to work an additional three years – which at the age of 67 I imagine would feel like an eternity – or go on unemployment benefits. The system must look after these people.

But for the many employed people who ignore the additional 9-10% salary they receive in the form of superannuation contributions, and allow it to be either not paid at all, or lost, or all the decisions on it made by complete strangers, this Budget is a clear message to start taking an active interest in it.

Access age for superannuation

There have been a lot of reports and rumours swirling in the media that the Abbott Government is planning to raise the access age of superannuation. Joe Hockey has stated that there won’t be changes to superannuation in ‘this term’ of Government, but they are not promising no changes ever.

I think it is likely that taking lump sums from super will eventually be either disallowed or discouraged through tax penalties, or the age for access uplifted to 70. However, I would be very surprised if there wasn’t some sort of access in the form of an income stream for those in their 60s. This is merely my prediction, and if there were proposals to raise income stream access to age 70, I’d be writing to my local member in protest.

It’s important to remember that the age pension system is not there as a reward for a lifetime’s hard work, it is a safety net for those who – for whatever reason – are in need of it. We have a world class superannuation system; use it, don’t squander it.

 

Alex Denham was Head of Technical Services at Challenger Financial Services and is now Senior Adviser at Dartnall Advisers.

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4 Responses to Raising the pension age is no reason to panic

  1. Martin June 7, 2014 at 11:41 AM #

    I think it’s obvious that super should form a core part of anyone’s retirement planning, however you’ve left me far from convinced that it’s safe to set aside the sovereign risks inherent in SMSFs for anyone who wants to build enough wealth to let them retire early. General commentary is that early may soon mean before 65!

    If I want to retire at 55 like my father (who only enjoyed 17 years of retirement despite the statistics), the safest strategy is to assume I need to fund 10 years retirement outside super. I have to pay 30% tax on sacrifices into super and frankly that is now too high for the risks that our current self centred bread of politicians find the super honey pot just too tastey to ignore for their tax and spend mentality.

  2. Ramani June 7, 2014 at 3:52 AM #

    Thanks Alex for pooping the panic party peddled by short-term focused commentators (an extreme form being the media).
    In preparing for the inevitable change following changes in longevity, we need to be careful not to resort to extreme fixation with averages, but also cater for those ill-served by our system (casuals, as pointed out; self-employed who are NOT subject to compulsion; those who by past occupations or poor health cannot wait some more for accessing their own nest eggs). Provided we introduce some flexibility (with stringent checks against abuse, of which there will be no shortage) we will be covering the field.
    I think letting the self-employed determine their retirement destiny without compulsion is goofy at best and rank discrimination at worst. Imagine the pressures they have in building their business and managing short-term cash flows. It is like exempting some road users from compulsory road rules like speed limits. The inevitable collateral damage would be all the users, and public confidence.
    Mandatory lobotomy for those who make policy, by removing their short term electoral cycle orientation, anyone?

  3. Graham Wright June 6, 2014 at 10:13 AM #

    You present a great case for all but the casually employed. My concern is that casual employment may become a growth industry. Those casuals who can work the full week in multiple jobs will have to closely manage their super to ensure all entitlements are received and go to a single superannuation account. Those who work only a few hours/week/employer may not work sufficiently with one employer to get an entitlement.

    You make the important point for all workers getting superannuation entitlements, it is time to take a greater interest in super accumulation and manage it for their own best long-term benefit. Govt provided retirement benefits ensure we can have a bed (hard mattress and thread-bare blankets) and a feed, no cigarettes, no beer and not too much take-away, and most certainly no wine or other good times.

  4. Peter Grace June 6, 2014 at 9:09 AM #

    Spot on Alex, well written. Can you get the daily media circus to take notice.

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