Thursday, August 28, 2014 NEWCASTLE HERALD 23

business PERSONALFINANCE

Super reformsano-brainerNOELWHITTAKER

The anomalies in the

system can be fixed

without too much pain.

SUPERANNUATION was leftmostly untouched in the MayBudget, but you can bet changes areafoot.

There is still a view in Treasurythat superannuation is the preserveof the wealthy, and that the presenttax concessions are unsustainable inthe long term.

To make it worse, someinstitutions are taking it uponthemselves to makerecommendations to thegovernment about the waysuperannuation should be changed.

The latest missive from TaxpayersAustralia is typical. It has justreleased a six-point plan that wouldlimit lifetime concessionalcontribution limits to $600,000, andlifetime non-concessional limits to$1.8 million. It also believes that theincome of a superannuation fund inpension mode with a balance ofmore than $1 million at the start of afinancial year should be taxed at15 per cent with a rebate on the first$15,000.

Furthermore, it is pushing foraccumulation accounts withbalances of more than $2.5 million tobe taxed at a flat 30 per cent.

It believes ‘‘such proposals willensure that the very wealthy cannotpark their assets so as to have a tax-free retirement income stream’’.

I have said repeatedly that peopleare losing faith in thesuperannuation system because ofthe continual changes. However,there are anomalies that could becorrected without too much pain.What follows is the Noel Whittakerplan to reform and simplify oursuperannuation system.

A major anomaly is the differencebetween accumulation mode andpension mode. Currently, a fundpays tax at 15 per cent per annum onits earnings while money is beingcontributed to it, but becomes a tax-free fund once it starts to pay apension. This increases complexitybecause a person who is drawing a

pension, and contributing as well, isrequired to have two separate funds.A pension fund cannot acceptcontributions.

It would be much simpler toeliminate the difference betweenaccumulation mode and pensionmode and have a flat tax of 15 percent on earnings from cradle tograve. This would plug a big hole ingovernment revenue and make thesystem consistent. Then, a personcould open a superannuation fundwhen they started work and staywith that fund for the rest of theirlife.

It is manifestly unfair to place alimit on how much can beaccumulated in a fund, or topunitively tax anybody who buildsup a hefty superannuation balance,as it’s effectively a penalty on thosewho can choose a portfolio that willmaximise returns. The simplersystem is to retain a cap oncontributions and index it.

The cap should be the same foreverybody. Many women areinsufficiently superannuated

because of gaps in their careerswhile having and raising children.When the Howard governmentchanged the rules in 1996, its policywas a cap of $50,000 on concessionalcontributions without respect forage. It was Labor who chopped it inhalf.

I understand the thinking thatwealthy people should not beallowed to accumulate money insuperannuation indefinitely – it is aproblem that is simply solved.Change the rules so that, once aperson reaches their preservationage, they are required to draw aminimum amount from theirsuperannuation in line with theregulations that govern pensionfunds now.

All those who are keen to punish‘‘the rich’’ should think ahead. Aperson who is 25 and earns $35,000 ayear would have accumulated over$4 million in superannuation at age65 just relying solely on theemployer contribution.

Don’t shoot yourself in the footover some misguided class war.

Now’s the time to reduce debt, not lock in moreBy CATHERINE ROBSON

TAKE CARE:

With rates that havebeen low for such a

long time, it’s easy tobecome desensitised to

and complacent about debt.

PREDICTING interest ratemovements is a bit of a nationalpastime and while this can becomean obsession for some, their futurecourse is well worth thinking aboutby all of us.

Most economists believe ratesare unlikely to go much lower.

While some are predicting smallrises starting from the fourthquarter of this year, others believeit will take until the first quarter of2016 for the Reserve Bank to raiserates from the current 2.5 per cent ayear level.

The policy of keeping interestrates low encourages greaterborrowing and spending.

However, it’s often beneficial todo the opposite of what the herddoes.

With rates that have been low forsuch a long time, it’s easy to becomedesensitised to and complacentabout debt.

During the past decade there has

been a move away from principaland interest lending (whichrequires some repayment ofprincipal with each monthly

payment) to a predominance of‘‘interest-only’’ loans.

The flexibility of these loans areattractive yet there’s often a risk

that principal repayments areindefinitely deferred, withborrowers forgetting that makingthe monthly interest payment isgetting them no closer to beingdebt-free.

Knowing that rates can’t stay lowforever, one strategy is to lock in afixed rate for a longer term, withsome institutions now offering five-year fixed rates at less than 5 percent a year.

However, paying off debt is aneven better approach. While it mayseem counter-intuitive, it offersmany benefits, including in-builtprotection for when rates start to goup.

Making additional principalrepayments gives you greaterability to absorb the increasing costof interest, because you can keepyour repayments the same andhave a lower proportion allocatedto the principal (which willnaturally absorb the higher interestcosts).

This strategy will also give you a

greater sense of control over yourfinances when interest ratesinevitably begin to rise.

Furthermore, cheap credit oftenfuels asset price expansion, andthis is one of the reasons it’scurrently difficult to findcompelling value in either theequity or property markets.

Rather than borrowing more tobuy over-valued assets, a betterway to create equity in yourcurrent investments is to reducedebt.

If your debt is mainly consumerdebt (personal loans or creditcards), then avoiding the high costof these types of lending products isa good idea at any time, howevernow is a better time than ever.

By reducing consumer debt,you’ll be in a strong position to useyour cashflow to buy well-pricedassets as opportunities present.

Rates will not stay low forever, sotake advantage now and reduceyour debt, instead of acquiringmore.

Noel Whittaker is the author ofMaking Money Made Simpleand numerous other books onpersonal finance. His advice isgeneral in nature and readersshould seek their ownprofessional advice beforemaking any financial decisions.Email: noelwhit@gmail.com.

Q My wife and I receive the partage pension plus $7800 a year

from a fixed-interest investmentaccount. This interest is treated as awage, and we receive no otherincome. I retired in August 2013 andpaid full tax on $65,000 in holidayand long service leave. Will this taxbe treated as wages or an asset byCentrelink in 2014?

A A tax refund is not income forsocial security purposes.

However, it may be assessed as anasset depending on how it istreated. For example, if depositedinto a bank account it would beasset tested and deemed. Theinvestment income is not treated asa wage for social security, but as afinancial asset and deemed. Whilethe holiday and long service leavepayment is assessable for tax, it isnot assessed as income for socialsecurity, although it may be assetand income tested according towhat is done with it.

Q I was born in 1947, so may notbe eligible for the PBS, but

could you tell me what the pensionage for women would have been onSeptember 20, 2009?

A To join the Pension BonusScheme, you must have

qualified for the age pension beforeSeptember 20, 2009. To qualify,men must have been born beforeSeptember 20, 1944, and womenbefore January 1, 1946.