The lack of an objective for superannuation has resulted in fund members focusing on estate planning strategies rather than how they should use their superannuation to fund their retirement, according to a technical expert.
SuperGuardian education manager Tim Miller said the use of pensions from superannuation in retirement was part of a ‘soft compulsion strategy’ driven by incentives rather than law.
“The incentive that once you’re over 60 the income stream is going to be tax free – that’s a pretty solid incentive for most people – and the incentive that if you’re under the transfer balance cap, you are going to get the exempt current pension income,” Miller said during a presentation at the SMSF Association National Conference in Adelaide today.
“Those incentives are purposeful for getting the end result of people drawing down [on their superannuation savings], but retirement income is not a compulsory cashing restriction.”
He said this runs at odds with the sole purpose test, which requires a superannuation fund to accrue benefits and then pay them at retirement age to a member.
“Everything else in the law contradicts the sole purpose test because we’ve got the transfer balance cap so we can have these accumulated benefits and we spend so much focus on estate planning,” he said.
“Rule number one: earn it, spend it and you don’t have to worry about the estate planning side of things, but the law doesn’t enforce that so we have to think through the strategic side of things.”
He said the variance between the sole purpose test and the other parts of super law was due to the failure of the major political parties to agree on an objective for superannuation.
“If the primary objective is in some way, shape or form to provide an income stream for retirement and substitute or supplement the age pension, then at least we know what the purpose is,” he said.
“At the moment we don’t have that purpose and so we fly by the seat of our pants and try to incorporate all these other strategies, but I go back to the fact that we should be telling our clients to spend their money.
“The minimum pension reduction does not achieve the purpose of what retirement benefits are for and this is relevant in the discussions that you are having with your clients on what do you need to live on and how do we draw it down, not how do you protect your capital from an estate planning point of view.”