Prof. Deborah Ralston

The independent Review of the Retirement Income System will provide an important opportunity to ensure that Australia’s world-class superannuation and retirement income system continues to evolve in a positive direction for all Australians.

John Maroney, the newly appointed spokesperson for the Alliance for a Fairer Retirement System, says  Alliance members have identified five key questions that should be addressed during the Review or afterwards by the Government:

• How can the retirement income system ensure incentives are in place to encourage those who can save for an independent retirement to do so and avoid disincentives?
• What is an adequate level of retirement income commensurate with their pre-retirement standard of living that older Australians should seek to attain?
• What are the defined objectives of superannuation and the age pension and how should these two pillars work together to ensure intergenerational equity and the sustainability of the retirement income system?
• How can retirement income policy settings ensure the maximum degree of certainty for those planning for retirement over decades?
• Where are there gaps or issues that indicate a lack of fairness in terms of either horizontal (between people with similar circumstances) or vertical (between different generations) equity in the existing three-pillar retirement system?

The Alliance congratulates its former spokesperson, Dr. Deborah Ralston, on her appointment to the Review panel and wishes her and her colleagues on the panel, Michael Callaghan and Carolyn Kay, well for the challenges ahead and pledges to provide carefully considered input to the consultation processes.

Maroney says: “At present, only 30% of the population over 65 is independent of government support.  The remaining 70% is comprised of 42% on the full age pension and 28% on a part age pension.  As the superannuation system reaches maturity and balances at retirement increase, reliance on the age pension will reduce. Over the same time period, the number of people and the proportion of the population, in retirement will increase. The Alliance calls on the Review to consider the adequacy of super to support retirees into the future.”

The age pension is determined by two means tests. The income test reduces the pension as deemed income rises. A higher deeming rates (set by the government) translates into a lower pension and creates an incentive for retirees to invest in risky assets in the pursuit of yield.

There is a need to review the deeming rates used to calculate a person’s deemed income from financial assets and to establish a benchmark which adjusts this rate periodically.  The current deeming rates no longer reflect the market rates of return received by age pensioners who are more inclined to rely on bank term deposits etc.

The assets test reduces the pension as retiree’s assets increase. At present, the age pension taper rate (the rate at which the pension is withdrawn) equates to a “tax” of 7.8% on assets over the age pension asset limit, well in excess of market rates of return available to part-pensioners on these assets. This creates an incentive to reduce assets in order to maximise the pension.

The net present value of the age pension can be over $800,000 for a couple in their 60s. This is supplied by the taxpayer with no effort required or additional savings on the part of the claimant.  If a couple, who own their own home, accumulated $870,000 at retirement, they would find that they are not eligible for the age pension. They may derive great pride from their independence from government welfare; however, with the present taper rate, their income could be no higher than a pensioner couple with half their assets. This may be a disincentive to maximise personal and super savings for retirement. Since its inception the compulsory superannuation system has produced a diversity of outcomes.

Average super balances at retirement are modest for most Australians, and the self-employed and those earning less than $450 per month with any one employer are excluded from the compulsory superannuation system. Indeed, a 2015 Productivity Commission report estimates that around 40% of Australians over the age of 65 years have no superannuation.

Australians plan for their retirement over several decades.  On-going changes to superannuation policy erode trust in the system and can result in unintended consequences for the viability of the system. No changes to superannuation policy should be made without a full regulatory impact statement, which would also accommodate potential impacts on the other pillars of the retirement system and grandfathering where appropriate to allow retirees and potential retirees to adjust their plans.

In addition to superannuation, the age pension and their own labour, older Australians draw retirement income from a range of sources including bank deposits, investment in shares, exchange traded funds (ETFs), and property, etc. In addition, about half the wealth for Australians over 65 years rests in the family home.  We strongly support the recent expansion of the Pension Loans Scheme to those who are not in receipt of an age pension as a means by which retirees can draw on the value of the family home.

The Alliance will prepare submissions for the Review and encourages all Australians who have an interest in promoting a fairer and sustainable retirement income system which provides greater adequacy and certainty to respond to the Review’s discussion paper that will be released later this year.

Read the Alliance’s July submissions on the Review’s proposed terms of reference to the Treasurer and Shadow Treasurer.

The post Alliance welcomes Retirement Income Review appeared first on AdviserVoice.

Prof. Deborah Ralston

Labor has released its election costings that show its spending promises will largely be funded by cuts to the incomes of retirees and other lower income shareholders to the value of $58 billion over the next decade.

“The Labor Party’s refundable franking credits proposal does not target the wealthy,” says Professor Deborah Ralston, a spokesperson for the Alliance for a Fairer Retirement System. “The vast majority of individuals affected, who receive a refund of less than $5,000 a year, would not be considered wealthy by most Australians.”

“Similarly, the majority of affected self-managed superannuation funds (SMSFs) receive a refund of less than $10,000 a year. Most of those funds have two members, so the average refund per member is less than $5,000 per person. Most of these members are not wealthy and the prospect of losing up to 30% of their retirement income is devastating.”

There is much debate about who is considered wealthy. Average annual earnings for full-time adults in Australia in November 2018 were $83,454. This is about the same level of income that would be received by a retiree who has the maximum of $1.6 million invested in a pension fund earning 5% a year. The franking credit refund relating to a diversified portfolio of that size (including 30% allocation to Australian shares) would be just over $10,000.

Michael Rice of the actuarial firm Rice Warner stated last year: “The present value of the maximum age pension for a couple who retires at 65 today exceeds $800,000.” This means that for every self-funded retiree couple who never draw an age pension, taxpayers save, on average, more than $800,000. Of course, most retirees will eventually become eligible for a part or full age pension, but we should avoid adding incentives to the system that encourage retirees to become pensioners before they need to do so.

Older Australians have received relatively little benefit from the Superannuation Guarantee introduced in 1992. The median superannuation balance for Australians over 65 years is very modest, and for those over age 70 the median balance in 2014-15 was zero. Recent ATO statistics show that almost one million taxpayers over age 65 (or almost 60% of those taxpayers) received, on average, franking credits of around $4,000 per year. The value of these franking credits would be lost by those on lower incomes who are ineligible for an age pension while those on higher incomes would retain the full value. The majority of older taxpayers receiving franking credit refunds are elderly women, often widows, left relying on income from a modest portfolio of Australian shares.

Franking credit refunds directly relate to the tax that has been paid on behalf of shareholders by companies. They are not a “gift” any more than any other repayment of overpaid tax by the ATO is a gift. As explained recently by Adrian Blundell-Wignall (former director of the OECD): “These people have paid tax – they are the beneficial owners of companies and had a 30 per cent tax paid for them by the “legal person” charged to do so on their behalf.”

Ralston says: “We need to think very carefully before we reshape the Australian superannuation and retirement income systems, key aspects of which have had bipartisan support since 2000 or earlier. Retirees and those approaching retirement have made plans over many years to enable them to achieve a secure and dignified retirement under the current structure.”

“Any proposals that risk causing major upheaval for over a million people deserve careful considered study within an overall review of the Australian superannuation, taxation and retirement income systems. Key principles of such a review would include fairness, adequacy, certainty and sustainability.”

The post Labor’s refundable franking credits proposal impacts more lower income-earners than the wealthy – refunds of company paid tax are not a “gift”! appeared first on AdviserVoice.

Prof. Deborah Ralston

The Labor Party’s refundable franking credit proposal will adversely affect pensioners who choose to use a self-managed superannuation fund (SMSF) to manage their retirement savings, says Professor Deborah Ralston, a spokesperson for the Alliance for a Fairer Retirement System.

Ralston says: “The simple fact is Labor’s proposal will not exempt all pensioners. Any individual who became an Age Pensioner after 28 March 2018 and has an SMSF will lose their franking credit refunds. Those not involved in an SMSF, but who qualify for an Age Pension after 28 March 2018, would still be exempt from this proposal while they continue to receive an Age Pension.”

“It also means that Age Pensioners in some large superannuation funds which do not pay tax now or at some time in the future would lose their franking credit refunds.”

Ralston says there is a legitimate debate about whether franking credits are a withholding credit or a final company tax. “Where there can be no debate is the fact this proposal unfairly targets those individuals choosing to use an SMSF as their retirement vehicle.

“The discrimination against SMSFs inherent in this proposal extends beyond the unfair application of the ‘pensioner guarantee’, with some large superannuation funds claiming they will be able to pass on the benefit of franking credit refunds to their retiree members. However, some large superannuation funds may not be able to pass full franking credit refunds to members if they have a large proportion of members in pension phase, and consequently insufficient tax liabilities to offset the tax credits. In essence, an individual’s tax treatment will depend on what type of super fund they have.”

Ralston says if the policy rationale is franking credits should only be allocated to those members of superannuation funds who give rise to a tax liability, then the policy should be designed to apply at the individual member level within ALL superannuation funds.

“Any changes to the tax treatment of franking credits should be applied equally irrespective of their superannuation structure.

“One recent superannuation policy change which did this was the introduction of the $1.6 million cap on tax-free pension accounts. In this case ALL superannuation fund members were treated equally, no matter how they invested their retirement savings.”

Ralston says SMSFs are an integral part of the Australian superannuation system, providing an important source of choice, control and competitive tension within the superannuation system.

The post Future SMSF pensioners ‘big losers’ under Labor’s franking credits proposal appeared first on AdviserVoice.

Prof Deborah Ralston

The Alliance for a Fairer Retirement System and the Council of Small Business Organisations Australia (COSBOA) are working together to highlight concerns about the Labor Party’s proposal to disallow refunds of excess franking credits.

These franking credits are better described as company paid tax credits because, in all cases, tax has been paid already on behalf of Australian shareholders.

Alliance spokesperson Professor Deborah Ralston said: “The Alliance has been ensuring that millions of Australians who are shareholders in Australian companies, including self-funded retirees and self-managed super fund members, are aware of the impacts of the proposed policy.

“However, there are many thousands of small business owners who are not aware that the proposal could severely damage their retirement plans and that’s why collaborating with COSBOA is so important.”

COSBOA CEO Peter Strong said: “Small business people need to be aware of how these changes may impact their income and that is why we are working closely with the Alliance.

“It’s unfair for a person who has reinvested income back into their business in good faith, planning their retirement while doing so, to have their plans changed by a decision they couldn’t predict.

“Small business owners who take their income from their company and are either in retirement or have lower incomes may be in danger of losing franking credit refunds that could substantially reduce their income,” he said.

The Alliance recently highlighted a clear example of how a small business will be impacted by this franking credit policy.

Arthur Smith, a small business cabinet maker in Brisbane, will expect his retirement income to drop by up to one-third if Labor’s proposal was implemented. The franking credits paid to him alongside income from the business will no longer be refundable if the policy proceeds, substantially impacting his income.

“With around 25 per cent of small businesses being in a company form (about 550,000 businesses), many small businesses needed to check if their future plans were going to be disrupted by this proposal, especially if they were nearing retirement. We are in dialogue with the Labor Party on this issue,” Mr Strong added.

Professor Ralston said that this was another example of how Labor’s franking credit proposal was affecting people’s retirement planning.

She added that the Alliance would be hosting its inaugural Fairer Retirement Summit in Sydney in September to help raise awareness about retirement system issues.

This will include immediate issues such as the franking credits proposal, and longer-term issues that the Alliance believes will require reform over next few years to achieve its policy goals of adequacy, certainty, sustainability and fairness for the retirement income system.

Both the Government and the Federal Opposition have been invited to address the Fairer Retirement Summit to ensure that both sides of the debate are given a fair hearing. The Summit will hear from a number of leaders from the retirement and small business sector, including Peter Strong, discussing important issues regarding fairness of the retirement system.

Updates on the Fairer Retirement Summit will be available on the Fairer Retirement website.

The post Small business owners alerted to ALP franking credit proposal appeared first on AdviserVoice.

Prof Deborah Ralston

The recently formed Alliance for a Fairer Retirement System highlights the risks facing thousands of small business owners from Labor’s proposal to disallow cash franking credit refunds. Earlier this week, Alliance representatives met with the Shadow Treasurer and Shadow Minister for Small Business, Chris Bowen, and with CEO of the Council of Small Business Australia (COSBOA), Peter Strong, to discuss the issue.

“Many small business owners may be unaware of the impact of Labor’s proposal on their retirement plans. Those who have invested equity in their company and rely on dividends to fund their retirement may be surprised to find a significant fall in income”, explained Professor Deborah Ralston, spokesperson for the Alliance.

The Alliance has launched a website to cater to the growing demand from organisations and individuals who are seeking support, information and research to better understand the impact of the proposal.

The new website www.fairerretirement.com.au provides information, and relevant news for small business, investors and retirees. It also provides an opportunity for individuals to lodge their personal stories concerning potential outcomes if the proposed policy goes ahead.

Announcing the launch of the Alliance website in Brisbane today is a team from the Alliance including spokesperson, Professor Deborah Ralston, Ian Henschke, Chief Advocate for National Seniors Australia, John Maroney, Chief Executive Officer of the Self Managed Superfund (SMSF) Association, Alan Marshall, President, Association of Independent Retirees and Michael Lorimer, Managing Director of SISFA.

he launch of the website comes off the back of growing scrutiny about Labor’s proposal, including Treasury’s recent analysis that casts doubt about the likely revenue generated. This recent coverage is just another thread in the growing fabric of discontent by everyday Australians who stand to be adversely impacted by the proposal.

A case study on the website highlights the plight of a Queensland small business owner, Arthur Smith who after years of building his small business, will commence his retirement in the near future. In this case the proposed policy would lead to a loss of one-third of his retirement income, previously comprised of dividends and franking credits. He notes that he and his wife, as self-funding retirees, “see (the removal of cash refunds) as an attempt to “steal” from us in order to fund a whole range of policies that we don’t necessarily agree with”, impacting his ability to enjoy the retirement he and his wife expected.

The Alliance was formed last month to explore options to fix problems with the existing superannuation taxation, Age Pension means testing and broader retirement income systems. In addition to the six original members, three more national associations have recently joined the Alliance:

• Association of Independent Retirees
• Australian Investors Association
• Association of Financial Advisers

Well known personal finance author, Noel Whittaker, will deliver a short presentation during the launch highlighting some of the key issues of concern to the Alliance.

The organisations that form the Alliance include:

• Australian Shareholders’ Association
• Australian Listed Investment Companies Association
• National Seniors Australia
• SMSF Association
• Self-managed Independent Superannuation Funds Association
• Stockbrokers & Financial Advisers Association
• Association of Independent Retirees
• Australian Investors Association
• Association of Financial Advisers

The post The Alliance for a Fairer Retirement System highlights the impact on small business owners of the ALP’s proposal to disallow franking credit refunds and welcomes three new national associations as members appeared first on AdviserVoice.

Prof Deborah Ralston

Several associations have formed the “Alliance for a Fairer Retirement System” to explore options to fix problems with the existing superannuation taxation, Age Pension means testing and broader retirement income systems. The formation of the Alliance is in response to Labor’s proposal to disallow refunds of excess franking credits for a range of retirees and shareholders.

The Australian Shareholders’ Association, Australian Listed Investment Companies Association, National Seniors Australia, SMSF Association, Self-managed Independent Superannuation Funds Association and Stockbrokers & Financial Advisers Association have formed the Alliance to work together on this important issue. We expect more groups to join the Alliance shortly.

These associations represent millions of senior Australians, shareholders, self-funded retirees and those planning a sustainable retirement, including over one million members of self-managed super funds.

The spokesperson for the Alliance, Professor Deborah Ralston, said: “I am very pleased that the Alliance has been formed as it will contribute substantially to the debate on improving retirement outcomes for millions of Australians.

“We need more evidence-based research and policy development and increased bipartisan support to complete the development of Australia’s retirement income system. Once that development has been completed, there needs to be a period of ongoing stability for the system so that Australians can plan for their retirement with confidence.”

“Providing for retirement requires trust that the system won’t change,” said Judith Fox, the CEO of the Australian Shareholders’ Association. “Having a self-funded retirement income requires long-term planning and stability. Ad hoc policy changes erode trust and don’t meet the need for a sustainable retirement savings plan. We need policy that looks at the superannuation and tax systems comprehensively rather than cherry picking elements to raise revenue.”

“National Seniors’ charter is to improve the lives of all older Australians,” said Ian Henschke, National Seniors Australia Chief Advocate. “Let’s hope this issue triggers a broader debate on systemic tax reform to fund sustainable, fair, private and public pensions. We’ll be working hard for that outcome.”

The CEO of the SMSF Association, John Maroney, welcomed the creation of the Alliance and stressed the need for clear communication on key issues. “Let’s talk about ‘company paid tax credits’ rather than ‘franking credits’ because that’s what the issue is. Companies have already paid tax on behalf of their shareholders; hence it is appropriate for those tax credits to be available for all shareholders.”

Michael Lorimer, Managing Director, Self-Managed Independent Superannuation Funds Association (SISFA), added “The consequences of this proposed policy will hurt real people who are not wealthy. Just because you have a SMSF or small APRA fund does not mean you are “wealthy”. Labor’s proposed policy will change investment behaviour which may drive more people onto reliance on the Age Pension. The announced carve-outs are arbitrary and mean there may be more complexity and unfair consequences will ensue.”
The Alliance is considering a report prepared by Michael Rice, CEO of Rice Warner, on the implications of Labor’s proposed policy on franking credits. That report clearly exposes many of the poor design features of the policy and the unlikelihood that the projected revenues will eventuate if the policy was implemented. The Alliance will commission and encourage further research and policy discussion on these topics and intends to convene a summit later this year on retirement system design.

“Labor’s proposal will cause a distortion of the market and give an unfair advantage to large taxpaying superannuation funds at the expense of everyday Australians who have worked hard, paid their taxes and carefully saved for their retirement through their SMSF or small APRA fund,” said Andrew Green, CEO of the Stockbrokers & Financial Advisers Association.

The Alliance calls on all political parties to carefully consider issues related to superannuation taxation and retirement design and to ensure that policy development is undertaken on a holistic basis and not via ad hoc steps in response to short-term revenue objectives or political objectives that could undermine confidence in the retirement system. Other associations who share these concerns are invited to join the Alliance.

The post New Alliance wants fairer retirement outcomes for all Australians appeared first on AdviserVoice.