Regulation, Retirement, Superannuation

Franking policy will hurt low-income retirees

New data analysis by SuperConcepts reveals the Labor Party’s franking credit policy proposal will pinch the pockets of low-income retirees.

A 20-year projection of different income levels, released today, confirms retirees with an account-based pension receiving a minimum pension amount of $45,000 a year at age 65 will be 15 per cent worse off in retirement savings after 20 years.

SuperConcepts technical and education services general manager and report author Peter Burgess said: “The data is very confronting and it was one of the key reasons why we made a detailed submission to the House of Representatives Standing Committee on Economics.

“Our data analysis supports a view that the federal budget will receive much less than the projected $55 billion over 10 years from this measure and that the budget savings will not come from high net worth individuals, rather it will come from the lower end of the income spectrum.”

The report analyses the impact of scrapping refundable franking credits over 20 years on the super balance of a member who at age 65 had an SMSF balance equivalent to the average SMSF balance for a member of that age, that is, $900,000.

The calculations assume a 40 per cent allocation to Australian shares, 3 per cent capital growth and a 4 per cent income return.

They also assume the SMSF has a single member who only has a retirement-phase interest in the fund and is receiving the minimum annual pension entitlement from an account-based pension.

The analysis shows the member’s closing balance after 20 years would be $825,519 if refundable franking credits were scrapped compared to $953,480 if refundable franking credits remained.

This would mean in year one the total income received including franking credits would be $36,771 compared to $30,600 if refundable franking credits were scrapped. The income differential would be $7631 a year after five years and $9207 a year after 10 years.

“As a consequence, after 10 years the member’s minimum annual pension entitlement would reduce from $60,756 to $56,762 and after 20 years from $88,298 to $76,991,” Burgess said.

“This is due to their retirement-phase benefit being replenished at a lower rate as pension payments are made, resulting in a quicker depletion of their superannuation assets.

“While the member in this example could increase their pension payments above the annual minimum requirement, this would accelerate the depletion of their capital and increase their dependency on the age pension at an earlier age.”

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