Our retirement planning can often take several decades of slow and patient preparation. And despite our best endeavours, sometimes we can be blindsided by unexpected changes.
The following example hopefully helps explain what I’m talking about:
Jim and Joanne Jones live in one of our major capital cities. They’ve spent years living in the same house. The financial demands of family and paying off the mortgage meant there was little left over that could be used for long-term savings. They have many fond memories of the simple yearly family holidays by the seaside where they would like to buy a home for their retirement years.
As they moved into their mid to late 50s, life started getting financially easier. At long last, they could put some money away for their old age. If everything goes to plan, they hope to full stop work sometime in their 60s.
They have watched, with some amazement, as the value of their home significantly increased over the last five years. They think it’s now worth somewhere between $1.5 and $2 million. This isn’t unusual – there are many people who have had similar experiences in quite ordinary suburbs of Melbourne and Sydney and to a lesser extent elsewhere.
The Jones own about $120,000 of other assets including their personal effects and at some stage might be entitled to an inheritance of an uncertain amount.
Their broad plan is to look to sell the family home and use $600,000 to buy their sea change retirement house. Any money left over will be used to fund their retirement living costs. They think they will have about $1.2 million for this purpose.
At the moment, they think their other super money will amount to about $300,000 so in total, they hope to have $1.5m towards their retirement.
Before budget night, the $1.2 million from the sale of the family home could have been contributed into super as an after tax personal Non-Concessional Contribution – half for Jim and half for Joanne. How you do this is a little tricky but most accountants and financial advisers would find a way over two or more financial years.
An option they had considered was to run their retirement assets down to about $700,000 so they could get some age pension and the valuable concession card that is issued with it. (On 1 January 2017, the age pension assets test cut-off threshold for homeowner couples will be $823,000.) It would be easy to do this – the Jones’ could have simply spent about $1.4 million on their sea change house leaving $400,000 from the sale of the house to go towards retirement.
The Jones’ didn’t like this idea because it left them with insufficient funds for the retirement lifestyle they wanted. And they also didn’t want to over-capitalise on the amount of money they spent on their new home.
However, the new $500,000 lifetime non-concessional cap has now forced them to reconsider their circumstances because they can’t contribute all of the $1.2 million into super. At best, they can contribute $500,000 each or $1 million in total, leaving $200,000 outside super.
Some will argue that their situation isn’t too bad. The $200,000 the Jones can’t get into super isn’t lost. It can be held in their own names and invested to pay income, which means all income and gains will be taxed at individual marginal rates. Without much other income, there might not be too much tax to pay on the investment income.
Some might argue that having $1.3 million in super puts the Jones in the top quartile of super pension amounts and there is a limit to the tax concessions the government can afford to offer retirees.
It is true that with that amount of money in super, the Jones do have a lot more than most people.
And on the face of it, this argument sounds fair but to be honest, it’s inconsistent. At the moment, the concessions available on the family home are open-ended. That is, the family home is fully exempt from CGT and from the age pension income and assets tests. So this raises a question about consistency. Why is one particular asset class – residential real estate – given unlimited concessions but others – for example, superannuation – have to be restricted or constrained because of tight Federal Government finances?
It would be political death for any politician to even attempt to remove any concessions on the family home but clearly, the politicians think they can attack super concessions and not suffer the electoral consequences.
I suspect – and also hope that – we might see some refinements to the government’s super policies. As I mentioned at the start, retirement planning can take decades. Hopefully, the government acknowledges and gives people like the Jones some flexibility to get money into the super system.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.