Changes to the superannuation system had been flagged before, but the transitionary measures that were laid out in the 2006 budget caught people unaware and it took some time before the news sunk in.
When it finally did sink in, it sent planners into a frenzy to get their clients properly informed and ready to make use of the ability to contribute up to $1 million tax free into their super funds by July 2007.
June is always a hectic month for planners, as they get their clients ready for the end of the fiscal year, but June 2007 could just as well have been one of the busiest months in the history of Australian planning.
Many planners recall that it was a challenge to meet the deadline for the super contribution, as for some clients it involved selling properties. The incentive to contribute as much as possible was given urgency by the decision to cap contributions at $150,000 a year after 1 July 2007.
However, it was a month of opportunity and excitement, both for planners, who were confronted with some of the highest levels of cash flow in decades, and pre-retirees, who hoped to achieve their goals much earlier than they previously thought.
AMP Capital Investors predicted at the time that the new super rules would contribute over $100 billion in extra flows into super accounts in the following three years. The June quarter of 2007 certainly saw a spike in inflows, with a total of new super inflows of almost $50 billion, compared to a quarterly average of $20 billion. Retail funds received the largest portion of contributions, taking in $23 billion in the June quarter.
For a brief period, superannuation was sexy. The topic had become front-page news for reasons other than a fall in returns and planners recalled that for the first time in their career clients called them with questions about super, rather than them having to remind their clients about the benefits of voluntary contributions.
But the exhilaration did not last as long as it should have. Just at the moment when large amounts of money had flowed into super funds, the global financial crisis started to wreak havoc among equity investments, and people’s savings dwindled before their eyes.
There is never a good time to have a crisis, but the Simpler Super changes put pre-retirees in a difficult spot. Not only did they invest in equity-heavy super funds at an all-time high for the stock markets, the tax-free contributions were also directly correlated to a spike in household debt, meaning people funded their contributions by drawing down on their mortgages in an attempt to contribute as much as possible to super accounts. It left many people light on assets and heavy on debt.
Still, saving for retirement is a long-term game, and for many people the losses they suffered were paper losses as they still had enough time to ride out the storm. The markets have already show a significant recovery since March 2009, and those who practice crystal ball gazing for a living are optimistic about the stability of the recovery.
Simpler Super also enabled people over the age of 60 to make withdrawals from their superannuation fund without having to pay taxes, regardless of whether they took super as a lump sum or as a pension payment. Many financial services companies felt that removing the tax hurdle for people over 60 would improve the reputation of super as a means of creating wealth over the long term. It took away the fear that once people had contributed to their super account they would not be able to access their fund for a long time.
The changes to the super system in 2007 were extensive, and as such the moniker of Simpler Super was slightly deceptive.
The myriad changes implemented left much room for interpretation; so much room that even the Australian Taxation Office publicly vented its frustration, saying uncertainties about taxation requirements left the tax office to work in the dark. In an attempt to make the system workable the government made more changes and then tweaked regulations some more. One particular income tax regulation (300-200.02) was even rewritten three times over the period of six months.
For financial planners the new regulations caused confusion about the exact application of the after-tax contribution limits.
The rule that pre-retirees can contribute a maximum of $150,000 a year was pretty straightforward, but the rule that this could also be $450,000 spread out over three years – meaning that people could contribute more than $150,000 in one year if they would contribute less in the following years – caused some confusion about how often people could make use of this option, especially when they were approaching the age of 65.
As Australia’s population ages, the chances are the super system will receive a lot more finetuning and even the occasional overhaul. To address these changing circumstances, the government announced in this year’s budget that it would seek to raise the age at which people qualify for pension from 65 to 67 – a transition that starts in 2017 and is scheduled to be completed in July 2023. Despite some heavy criticism of the measure, it is a necessary one.
By 2047, the percentage of Australians over 65 will have doubled to a quarter of the population. And Australia is certainly not alone in its age measures. The United States, Germany, The Netherlands, Norway, Denmark and Iceland are all progressively increasing their pension age to 67.
It is likely the regulatory system will experience a lot more changes, and although it remains to be seen whether super will become sexy once again, clients will almost certainly call upon the help of their advisers for many years to come.
