Budget reminds us there's more to retirement than super

The 2016 Federal Budget alerted every member of a superannuation fund – large and small – to the fact that risk is not the sole domain of investment markets.

Regulatory risk is firmly back on the agenda for those planning their retirement savings.

This year's budget is the most far-reaching in terms of the fundamental structure of super since the 2006-07 budget delivered by Peter Costello that dramatically made pension accounts tax-free.

How things have changed in just a decade. Costello had the luxury of working with a budget strongly in surplus and an economy that had seen growth of 3.6 per cent on average over 15 years.

Scott Morrison's first budget was delivered in vastly different circumstances. The budget deficit reflects the impact of a global financial crisis, the end of a mining boom and continued sluggish global economic growth.

The debate over the changes to super tax concessions is likely to run much longer than the immediate focus of the election campaign.

Is an annual concessional cap of $25,000 too low? Is a one-off $1.6 million tax-free pension account too restrictive? As always the devil will be in the detail as legislation and regulations covering how the changes will be implemented and operate become available.

Putting aside the technical detail for the moment, the Morrison Budget signals two fundamental policy changes.

One was expected, in that the government has accepted the recommendation from the Financial System Inquiry to enshrine the objectives of super into legislation. For the record, the objective the super system needs to deliver is to "provide income in retirement to substitute or supplement the Age Pension."

The second policy shift is that, while the government is prepared to offer tax concessions to encourage savings for retirement to reduce the dependence on the aged pension, it is no longer prepared to do it on an open-ended basis – hence the $1.6 million cap on the pension account.

There is bound to be fierce debate on the adequacy and flexibility of that balance transfer level. As the debate rages, it is worth remembering that even if funds above $1.6 million have to be in a super accumulation account, 15% tax is still highly concessional tax rate compared to higher marginal rates - and where a portfolio includes Australian shares with imputation credits the effective tax rate will be even lower.

The policy change in terms of effectively putting a ceiling on super tax concessions will no doubt focus a lot of specialist superannuation advisers' minds on the issue of tax structure – particularly for higher net wealth clients.

While tax should not drive investment decisions about where certain assets are located – within super, outside super for example – it is likely to get much more attention along with strategies to maximise concessional and non-concessional caps.

There is no doubt the 2016 federal budget has made some fundamental changes to the way super works.

What has not changed is the challenge for all Australian workers – to build enough savings to fund a comfortable retirement lifestyle. What this year's budget signals is that increasingly the future may be a different combination of savings inside and outside the super system.

Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.

Reproduced with permission of Vanguard Investments Australia Ltd

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