Proposed changes to superannuation have the potential to reshape the retirement landscape. The objective of super remains the missing ingredient in the mix.

At its most fundamental, successful investing is about getting the balance right between risk and reward.

Some risks are front and centre; they are in your face (or at least on your nightly TV news or social media feed). Market risk, manager risk and specific company risk are the usual suspects when investors are considering risk within their portfolio.

After the past 12 months no-one doubts the impact of geopolitical risk given Russia’s invasion of Ukraine or the turmoil that comes with a global pandemic.

But in recent weeks we have been reminded of another risk – legislative risk.

The risk that comes when governments change rules, particularly tax rules.

It is not surprising that any change to superannuation law is contentious, because inevitably there will be aggrieved people who have invested into their super based on the law of the day only to find the goalposts are going to move.

It also speaks to the success of superannuation that it has become such a key part of working Australians’ financial well-being and planning for retirement that any change will be hotly debated.

Changing the rules

The debate on the proposed $3 million cap on individual superannuation balances has a considerable way to run leading up to the Federal Budget in May and beyond, given the planned start date is not until July 2025.

The Government framed the initial debate around the question of whether very wealthy people – those with more than $100 million in super was an example used by Assistant Treasurer Stephen Jones – will be subsidised by other taxpayers?

That is a hard principle to argue against on a public policy basis, irrespective of whether the Federal Budget needs major repair.

But the devil will be in the detail in terms of how it will be implemented. Certainly, taxing unrealised gains raises interesting questions, along with the lack of indexation of the cap limit, to highlight just two fundamental points.

This entire debate of course would be entirely academic if the reasonable benefits limit (RBL) had not been scrapped back in 2006-07. Which perhaps reminds us that the original super system design was pretty well thought out, because the concessional tax rates applied up to the RBL and above that marginal tax rates applied.

This removal of RBLs was the driver that has led to excess funds being able to be held within super at concessional tax rates. It certainly provided simplification but at a cost that was perhaps not well understood at the time.

Enshrining an objective

These types of tax rule changes always run the risk of unintended consequences and while the vast majority of people will be unaffected – at least initially – there is always the risk they may undermine confidence in the broader superannuation system.

This could particularly be the case among some younger members who may decide to not make voluntary contributions for fear of future rule changes.

The prospect of further rule changes also underlines the value of finally enshrining an objective of superannuation into legislation, something that was originally proposed back in 2014 in the Financial System inquiry.

While near-term focus of the public policy debate may well be on whether the objective should solely focus on retirement income and the definition of sustainability, hopefully, a legislated objective will provide a framework for future proposed changes to be assessed against.

The concessional tax rates on super means for most people that continuing to contribute as much as you can will make as much sense after July 2025 as it does today.

For those people fortunate enough to have to consider the impact of caps on their balance, it likely means another thing.

That is, to factor into the annual conversation with your financial adviser what should be within super and what investments would be better being held outside of the super system.

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