Govt super stall drops retirement heavy lift on shoulders of individuals

October 17, 2014
Govt super stall drops retirement heavy lift on shoulders of individuals

Maggie Tagg, who writes Citadel 'Financial Info on the Go' for GSA, says the recent government decision to defer the planned increase in the Superannuation Guarantee (SG) to 12 per cent to 2025-26 puts the onus squarely on individuals to save more for their retirement if they want to enjoy a comfortable lifestyle.

In this article the focus is on strategies that will put you in the driver's seat and help you achieve the retirement lifestyle you deserve.

The safest place to park your cash is in the bank right?

Not necessarily. When inflation is higher risk than bank interest rates, as it is now, anyone with cash in the bank is going backwards. In order to protect the future purchasing power of your savings, you need to cast your investment net wider Australians are going to have to save a bit harder to build their retirement nest egg, thanks to the recent government decision to postpone increases in compulsory superannuation.

This and other changes make it more important than ever to take control of your retirement savings.

As part of the scrapping of the mining tax, the planned increase in the compulsory superannuation guarantee (SG) to 12 per cent has been delayed by six years. As a result, it is proposed that it will stay at 9.5 per cent until 2021 when it will increase by 0.5 per cent a year until reaching 12 per cent in 2025-26.

The other key change is that the $500 Low Income Super Contribution for workers earning less than $37,000 a year will be abolished in 2017.

The aim of this contribution was to create a more even playing field for low-income Australians. Because SG contributions are taxed at the concessional rate of 15 per cent, people on higher marginal income tax rates enjoy an advantage, whereas those on the lowest marginal rate of 19 per cent effectively receive no tax concession.

Additional contributions

As a general rule of thumb, it is suggested that you will need 70 per cent of your final annual income to enjoy a comfortable retirement.

While it has always been the case that anyone aspiring to more than a basic lifestyle in retirement needs to supplement employer contributions with their own savings, the delayed increase in SG payments underlines the importance of doing so. The changes will leave some people tens of thousands of dollars worse off, but the actual amount depends on your age and financial circumstances.

Take the example of someone aged 20 earning $35,000 a year; assume they get a pay rise at age 30 to $80,000 (in todays dollars) and another at 40 to $150,000. Assume also that their salary is indexed by 3 per cent a year between pay rises.

Factoring in average returns of 7.35 per cent a year, our 20-year-olds balance at 65 would be $594,106 in todays dollars. Under the original SG timing, it would have been 2.65 per cent higher ($16,222) at $610,328.

But a 40-year-old who had salary sacrificed to build up $250,000 in super and was earning $180,000 indexed at 3 per cent would be 3.47 per cent, or $42,487, worse off at 65.

Low income super contribution

The removal of the $500 contribution will have the bigger impact for low income earners.

SGS Economics estimates that someone who earns $35,000 a year from age 22 to 69 will be 16.7 per cent worse off under the new rules. Only 3.9 per cent of that is due to the SG freeze; the remainder stems from the abolition of the rebate.

Editors Note: Maggie Tagg is an Associate Financial Planner, who holds an Advanced Diploma of Financial Planning.

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Blueprint for an Ageing Australia

National Press Club, Canberra, September 3:

On the subject of Retirement Incomes former Chairman of National Seniors Australia and now Chairman of the Federal Governments Panel on Positive Ageing Everald Compton told the National Press Club today that: This is the most contentious issue of them all. It is the one that creates the most public debate and about which there is the greatest uncertainty in the minds of millions of retirees, he said.

A totally new retirement incomes policy is needed right now and, once legislated, must be left alone, as constant tinkering with it creates enormous and unnecessary tension in the lives of Seniors.

We will not reach a satisfactory situation with either pensions or superannuation until all current cut-and-paste legislation is put through the shredder an event that should have happened a decade ago, Everald Compton said.

If we act now, we can ensure that we will turn ageing into a significant social and economic asset, not a liability, and the Blueprint for an Ageing Australia that we present to the nation today strives to do exactly this, he said.