5 August 2014

Australia, Melbourne

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:

  1. Extend Division 293 tax to all those on the top marginal tax rate
    The current arrangements apply an additional 15% tax on concessional contributions for people who earn above $300,000.  Extending it to everyone on the top marginal tax rate would reduce the concession to those currently earning above $180,000 (but less than $300,000) from 34% to 19%.

  2. Improve the Government Low Income Earners Superannuation Contribution
    Ensure nobody pays more tax on their concessional contributions than they do on their income and those subject to the 19% marginal tax rate pay no tax on their concessional contributions.

  3. Introduce lifetime contribution caps but with a maximum contribution in any year
    Maintain current concessional caps with the standard cap continuing to be indexed.
    Introduce a lifetime approach to concessional caps – for example a person’s annual cap could be increased by half the unused amount from the previous year but with a limit of say three times the annual cap in any single year.  A similar approach cap could apply to non-concessional contributions thereby removing the existing complex three year rule. This would limit the cost of the tax concession in any one year while allowing individuals who have started saving late or had interrupted careers to catch up.

  4. Limit the amount of assets that can exist in the tax exempt pension phase.
    Limit assets in a tax free account-based pension to $2.5 million (indexed) per pensioner.  Assets in excess of this amount could be commuted (i.e. paid out) or transferred back into the accumulation section of the superannuation fund and therefore be subject to the normal 15% tax on investment earnings.  Special consideration would need to be given to defined benefit pensions and annuities.  A five year transition period could also be provided for existing pensions.

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[1] 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.

[1] Mercer’s 2012 Superannuation Sentiment Index

About Mercer

Mercer is a global leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. Mercer’s 20,000 employees are based in 43 countries and the firm operates in over 140 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With 55,000 employees worldwide and annual revenue exceeding $12 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. Follow Mercer on Twitter @MercerAU @MercerInsights