Limiting the balance of account-based pensions to $2.5 million (indexed) and subjecting investment earnings from savings in excess of this to the 15% standard superannuation tax rate, and introducing life-time contribution caps would create a fairer superannuation system and reduce the cost of tax concessions to the Federal Government according to Mercer.
These suggestions are two in a four point tax and super plan that will be revealed by Mercer Senior Partner Dr David Knox at the Financial Services Council conference in Cairns later this week.
Superannuation tax concessions will inevitably come under the spotlight again in the Federal Government’s pending Tax White Paper. Mercer supports the scrutiny but believes tax concessions on compulsory super are a critical part of our three pillar retirement savings system.
Mercer is developing financial analysis to further support its proposals and contribute to the ongoing discussion. Commenting on the issue, Mercer’s Managing Director & Market Leader, Pacific, David Anderson, said, “We need to consider the system holistically when reviewing the taxation of super because as sure as day follows night, changes to tax will lead to changes in behaviour and how people save for their retirement.”
“Also, we cannot forget increasing tax on super will reduce super savings and would lead to an increase in future social security payments.
“We support a fairer system, but it has to be simple to administer or the benefits of any changes will be lost. It also has to look at both the pre and post-retirement phases of our lives,” said Mr Anderson.
Mercer’s four point tax and super plan includes the following recommendations:
Dr David Knox, Senior Partner at Mercer, said, “We need a retirement savings system which encourages individuals to save and compensates them for the lack of access to their savings. We need equity and administration efficiencies that are sustainable. We think our four recommendations meet these needs.”
“The current tax-free status we enjoy in our retirement years needs to be reviewed. However slapping a tax on investment earnings will have other consequences. Our approach to limiting assets in account-based pensions means no new tax, just a limit on the amount which can be transferred into the tax exempt pension section of a superannuation fund.
“In our working lives all Australians should have the opportunity and flexibility to build a more secure retirement when they can afford to contribute. We believe lifetime limits to concessional and non-concessional caps would create a much fairer system; they would secure more adequate retirement incomes for more Australians; lessen the cost of the age pension to the Federal Government and tax-payers; and allow people – particularly women – who have been in and out of the workforce to catch up in their retirement savings.
“Lifetime concessional contribution caps would provide all Australians with an equal opportunity to build their nest egg when they’ve got the financial capacity to do so,” said Dr Knox.
Mercer’s research shows around 1 in every 5 Australians (21%) believe legislative changes regarding how superannuation is taxed is the single factor with the most potential to have the greatest impact on their super balances when they retire; second only to global economic conditions and share-market fluctuations.
“The taxation of super can be improved for the benefit of everyone. What’s important is that any changes are made after looking at our retirement savings system in its entirety and the impact of altering the tax model could have on the future costs of funding the age pension,” Dr Knox said.
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