Planning for retirement not so simple

Planning for retirement is no longer the simple process it once was. Choosing investments is now much more complicated. Already the government has capped the maximum amount that can be invested in tax-free pension funds at $1.6 million and limited annual tax-deductible superannuation contributions to $25,000.

Higher income taxpayers will require other ways to accumulate sufficient wealth to maintain their living standard in retirement.

The most tax effective and popular way to do this has been borrowing to buy property assisted by negative gearing tax provisions. A change in government could close off this option to new investors purchasing existing properties. In addition, all investors buying new assets would face a 50 per cent increase in the capital gains tax payable when these are sold.

Whereas now, investors can be reasonably confident capital gains tax will not be levied on gains required to match inflation, that would no longer be the case for new investments.

Higher income earners would still have a strong incentive to build wealth to protect living standards but options would be more limited. Investments in trusts and personal names are the two main options but these in most cases would involve larger personal tax bills calculated using relatively high marginal rates.

At lower or modest income levels, the impact of current and future tax rules is a lesser concern.

Super is still attractive, especially when the family home is owned outright. Nevertheless, the doubling of the severity of the age pension assets test in 2017 and the plan to cease cash refunds of franking credits to pension funds and low-income retirees if enacted would reduce the benefits of accumulating assets for retirement.

For a married couple, the current actuarial value of the combined age pension is around $800,000. Yet the assets test precludes access to any age pension when assets are only slightly higher. Unless future retirees can accumulate much more than $800,000, they will be reducing the pension available to them. When the
assets test applies, every $100,000 of assets reduces annual pension entitlement by $7800. Without access to cash refunds of franking credits, the returns on dividends from share investments would be lower than those needed to provide a replacement income for the pension. Therefore, limiting assets to levels that do not preclude or only marginally reduce the pension could become the most popular strategy. In this process, the most disadvantaged would be the non-homeowners who receive only a meagre $200,000 additional asset test exemption in lieu of the total exemption of the family home.

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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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