Abolish preservation age

Article from SMSF Adviser 5 June 2014

Abolish preservation age, says lawyer


Written by Elyse Perrau and Katarina Taurian Thursday, 05 June 2014


Following hints from Treasurer Joe Hockey that the preservation age may increase before the next election, one lawyer has said the preservation age should be “abolished” altogether.

SMSF Adviser conducted a straw poll following this suggestion from the Treasurer, asking practitioners if they believe the preservation age should be increased in line with the changes to the age pension.

Of the 147 respondents, 64.6 per cent voted ‘no,’ while the remainder voted ‘yes.’

Speaking to SMSF Adviser, Dwyer Lawyers principal Dr Terry Dwyer said increasing the preservation age would disadvantage heavy manual labour workers and would push people into looking for other saving alternatives outside super.

“If you don’t give people the flexibility and if you keep on trying to push out the preservation age, you undermine confidence in saving overall.”

He would like to see the preservation age abolished altogether, allowing Australians to access their super whenever needed.

“The preservation age concept is fundamentally wrong,” he said.

Also speaking to SMSF Adviser, the SMSF Professionals’ Association of Australia’s director, technical and professional standards, Graeme Colley said any proposal to raise the preservation age should involve “careful and measured debate.”

“Also, any examination should include the impact of an increased preservation age placing demands on other parts of the social security and welfare systems, particularly, between the cessation of work and the commencement of an entitlement at preservation age,” Mr Colley said.

“In some cases people may need to access New Start and disability benefits in the interim if they are unable to obtain paid work.”


Some further comments


0 #19Dr Terry Dwyer 2014-06-07 13:03

The idea was that super benefits would become a lifetime income averaging mechanism and be a taxable top up or replacement income for earned income at any time in the life cycle and thus offset the need for Commonwealth income benefits pro tanto.Deductions each year would be limited to earned income and tax would only be on the end pension or annuity benefit.Also super would be used up over the lifetimes of taxpayer, spouse and dependants.
0 #18Steve Blizard 2014-06-06 13:29
Ralph, this proposal would not break the sole purpose test, just as the current hardship provisions don’t. ato.gov.au/…/… Also, the ability to take a [small] pension, when required, would increase the desirability of voluntary contributions, as the member can see the point of doing so. Young people get this instantly, when you sit down & explain the concept to them. 100% engagement, which is what everyone knows is desperately needed.


0 #17Ralph 2014-06-06 13:02

If you abolish the preservation age aren’t you also abolishing the sole purpose test in which case what is the rationale behind superannuation?If you can put money in and take money out at will then wouldn’t people just salary sacrifice everything they can to pay 15% tax and just take it straight out again. Or are you also proposing abolishing the concessional tax rates that superannuation funds and pensions enjoy so that all withdrawals from super become fully taxable.


0 #16Steve Blizard 2014-06-06 12:50

Also Wayne, the introduction of tax free transition pensions [not lump sums] has increased both the concessional & non-concessiona l contributions into super. To the point where the Peter Costello had to put a cap on what was coming in – the TTR pension system was too successful. It was only before TTR pensions were people really blowing their lump sums at 55. That has now dropped off substantially today.


+1 #15Steve Blizard 2014-06-06 12:46

Wayne, moving to Terry’s proposal would pave the way to eventually solving the problem of the psychology of the lump-sum. When members realise super is an income averaging tool to provide a pension; not a “lets party at 60 jackpot scheme”, a lot of the issues you raise will fade away. You start that education process early in the life of a member, as per Terry’s proposal. With the Centrelink Age Pension being pushed out to 70, globally, the problem of spending your saving will become less of an issue. If we don’t, people will save elsewhere as access is a huge issue. Even now, I could count on one hand the number of people that over-spend their super. Most are very careful. One thing is for sure, the current system is not working, and needs a serious overhaul. If members can’t see a benefit now, they simply won’t engage

+3 #14Wayne Leggett 2014-06-06 12:17

Great idea, Terry. In fact, why don’t we allow ATM access to super account balances? That would REALLY make them more attractive.
I’m guessing your contentious comment was purely to engender debate; at least, I HOPE it was!
It is already too easy for Australians to collect all their super free of tax at age 60, have a wild old time for the next five years, then put their hand out to Centrelink when they hit 65. It might be an appealing prospect to the individual, but it’s a massive economic burden on our society, one for which taxpayers have to foot the bill.


0 #13Steve Blizard 2014-06-06 11:18

Tony, Treasury is not concerned that people “use” the system to their best advantage. Treasury are only interested in stopping “leakage”. The new work for the dole proposals has a lot of support amongst hard working taxpayers, so that will help address people who may game the system.


0 #11Terry Dwyer 2014-06-06 10:32

Historically, the tax treatment of superannuation in the 1915 Act arose out of a tradition going back to Pitt’s Act of 1798. John Stuart Mill among others saw that taxing terminable, impermanent, wage or salary incomes the same as permanent funded incomes from land was unfair and suggested a deduction from income from personal exertion. William Vickrey, the Nobel Prize winner, in his 1947 book, Agenda for Progressive Taxation, suggested we look at lifetime forward income averaging – which is what superannuation basically should be seen as – a method of removing the arbitrariness on an annual accounting period for tax. Of course, super was accepted as providing incomes for spouses and dependants as well.

0 #10Steve Blizard 2014-06-06 10:19

Also, if members work out under the new system that they are able to receive a higher [account based] pensions payment, as a percentage of their actual fund value, they will be far more likely to go along with increases in the mandated SGC percentage, as well make additional voluntary contributions. The Singapore scheme has been modified even further to provide self-funded health care costs. Australia is on the verge of having a national meltdown over a $7 co-contribution for Medicare, whereas in Singapore your “co-contributio n” is in your own fund, and it belongs to you. A massive difference in achieving specific results.


0 #9Steve Blizard 2014-06-06 10:05

The current system allows for access to super funds in the event of “hardship”, so all age [low$] pension access simply provides a more consistent approach to access. Income tax & income test assessment will reduce unnecessary access. humanservices.gov.au/…/…. And if a low income earner can pay their house off a few years sooner, what’s the problem with that?

0 #8Steve Blizard 2014-06-06 10:00

Superannuation was not originally designed as a “savings tool”. From the Vickery book in 1947, you will find that it was designed to be a lifetime income averaging scheme. This concept is very familiar to farmers, both with Income Tax averaging, & with Farm Management Deposit Bonds, which is accessible, but taxable. When you change your outlook on it’s function, it becomes a savings scheme that engages the voluntary saver, rather than leads to disengagement, as we witness for most people under 50 today. The current system may have $1.8 trillion in it, but it is essentially disfunctional.


0 #7Steve Blizard 2014-06-06 09:50
Tony, the key is to ensure that any [very low] pension payment is fully taxable & included in the income test for Centrelink purposes. By default this becomes a partially self-funded unemployment benefit in times of crisis/hardship – with the added benefit of reducing the load on Treasury. The current system encourages disengagement, whereas this brilliant proposal increases engagement for numerous reasons. When members understand that it is their money that they benefit from when necessary during various points in their working life, it helps counter buck-passing for responsibility. Pushing the Centrelink Age Pension out to 70 will stop most abuse of the system.
0 #5Dr Terry Dwyer 2014-06-05 23:56
if I recall rightly, what the Inter-Departmental Committee on Retirement Incomes basically agreed with in the end (before Treasury’s 15% tax ambush) was -. No preservation age. Super pensions able to be started and stopped and re-started at will. No limit on deductions up to earned income. No taxation on fund incomeBUT. Super to be taken as a taxable pension or annuity based on age at time of start.. All Commonwealth benefits to be income tested $1 for $1 against any super pension or annuity.For example, a woman with 10 years in the paid workforce and super of $30,000 would not get the lot on leaving to have kids but she would be able to get, say, a pension of $2,000 per annum or so, which would reduce pro tanto any Commonwealth income benefit.

+1 #4Steve Blizard 2014-06-05 18:49

The idea it seems would be to only allow 5% – 7% maximum [taxable] pensions payments [of capital], at any age, with the option to stop & start the pension at any time – say up to age 60. Considering that hardship provisions exist now, moving to this proposed system has numerous benefits. For example, you would find that “disengaged” members would become far more “engaged” if they can increase the dollar amount of the minimum pension they can receive. “Lost” super accounts drop substantially. If you know you can get some funds out when you need it, you are also more likely to want to contribute voluntarily. You need some carrot occasionally, not just stick. Considering super is simply lifetime income averaging, what’s the hang-up about getting a small payment when you really need it? This is a brilliant idea, that will iron out many of the inconsistencies that exist with the current system.