Untangling retirement policy maze

Continuing controversy over the generosity of the superannuation tax concessions and changes to the age pension arrangements are complicating retirement planning for millions of Australians. Unfortunately, the debate about changes to existing arrangements is likely to continue for a considerable time.

A recent Productivity Commission report has provided comforting news for the government by concluding that retirees generally use superannuation savings for the intended purpose of helping to fund retirement expenses. Contrary to the claims of some critics of lump sum superannuation benefits, most people behave prudently.

The report should help allay the fears of many that a future government could change the rules and stop them withdrawing their superannuation to use as they wish. While compulsory super recipients cannot alter their contributions when policies are changed, even the threat of changes can deter voluntary super contributions.

There's been a steep reduction in contributions by self-employed and other people not covered by compulsory contributions after the string of changes to tax arrangements since 2007. The more uncertainty about what the rules will be when it's your turn to retire, the greater the incentive to look at other investment alternatives including paying off the family home.

While the Productivity Commission report is a well considered and researched document, along with current government policy and super industry lobbying, it contains one major flaw. It fails to recognise the negative effects of compulsory super preservation rules that tie money up for so long.

When many people face uncertain job prospects and are struggling to achieve home ownership, the commission's recommendation not to allow lump sum withdrawal until age 65 ignores reality. The problem is that many Australians cannot be assured of continuing employment until age 60, the current compulsory preservation age. Taking this age up to 65 makes voluntary superannuation contributions unattractive compared with paying off a mortgage quickly.

For many, even compulsory super contributions make life more difficult for the same reason. The commission, along with many super industry lobbyists, considers that tying money up until a late age will boost retirement assets and reduce age pension outlays.

That may be the case for people on high incomes able to buy a home and divert money to super as well. But most of the younger population struggle to acquire a home and when they do, they run the risk of losing it through unemployment or even loss of overtime or the earnings of a partner.

Proposals to increase the preservation age will only add to the problems faced by many middle- aged workers if they lose their job or their relationship fails.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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