Consequences could be dangerous

Well, what a surprise. After denial after denial the government finally acknowledged how unpopular its original proposed changes to the superannuation system were and eventually had to water them down.

And it didn’t take a rocket scientist to predict the $500,000 lifetime non-concessional contributions cap would be one of the items that was eventually jettisoned.

I will give some credit to the powers that be in Canberra though that although perhaps it was a backflip and is being called out by some commentators as a broken promise, at least the backdown means we’ve arrived at a better position for all superannuants.

But even with the compromise of allowing us to make non-concessional contributions of $100,000 a year in the future, Treasurer Scott Morrison just couldn’t let go of that bee in his bonnet about superannuation being used predominantly as an intergenerational wealth transfer tool.

So to serve this aim, he maintained no non-concessional contributions could be made if an individual has $1.6 million of retirement savings.

In doing so, the government insists on setting dangerous limits that sends out an adequacy message that may or may not be appropriate, as well as continuing to complicate the superannuation administration landscape.

By setting the $1.6 million limit, the perception may be that this is the magical figure we all need to reach that will allow us to have a comfortable self-funded lifestyle in retirement.

Your guess is as good as mine as to how accurate this watermark may prove to be. However, as I have made the point before, by the time we realise this is not an adequate level of savings to self-fund one’s retirement, it will be too late and future generations will be left to fund the masses of people left to rely on the age pension for an income stream as they ride off into the sunset.

It paints a potentially bleak picture for the next generation and one they can curse the Treasurer about until their dying days as their predicament has been turned on its head. Rather than having an improved financial situation through an allocated death benefit, they’ll be left being financially worse off having to help satisfy a substantial age pension liability.

Of course, one of the proposed changes that wasn’t amended was the reduction of the concessional contributions cap to $25,000 per year.

The reduction of contributions caps is never received well and this move is no exception.

It may, however, explain why the government decided to reject the Financial System Inquiry’s recommendation to ban limited recourse borrowing arrangements (LRBA) outright for superannuation funds.

The use of LRBAs remains one way of circumventing the contributions cap limits as the acquisition of assets via this method is not included as part of the cap.

Already some industry sources are saying the popularity of LRBAs may see a pick-up for this very reason.

If so, the government may be inadvertently pushing SMSF members to walk a precarious tightrope of increasing the level of risk the fund incorporates without going too far and have everything turn pear shaped.

And again this potentially makes the landscape more attractive for property spruikers.

How some of the unintended consequences will play out is not yet known, but if they end up being disastrous, those on Capital Hill have only themselves to blame for a flawed consultation process.


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