Let’s call them Phil and Mary. Since Phil retired more than 15 years ago and predominantly invested in a portfolio of fully franked Australian shares, this elderly couple, now in their late 60s, have lived comfortably on the income their $1.1 million SMSF generates.
Not living a lavish lifestyle, but a comfortable one. Phil enjoys lawn bowls twice a week at his local club, while Mary is a bridge aficionado. There’s been the odd trip overseas, but on an annual income of about $50,000 they’re certainly not flying first class – or even business class.
Based on the SMSF Association’s calculations, on an annual income of $50,000, Phil and Mary are your typical self-funded retirees. But if Labor’s proposal to cancel cash refunds for excess dividend imputation credits becomes law, they will be its primary victims. Their fully franked share portfolio, at 40 per cent of their SMSF’s assets, will mean a loss of income of $9430 – nearly a 20 per cent drop. That will be their ‘reward’ for being self-sufficient in retirement and not relying on the age pension.
To say Labor’s proposal has the potential to turn their world upside down – and on our estimates, there are more than 1 million people who will be affected like Phil and Mary – is an understatement. They have played by the rules – and once again politicians are proposing to tear up the rule book.
It’s worth remembering refundable franking credits have been a well-established principle for nearly two decades, having been introduced (with Labor’s support) on 1 July 2000, and SMSF trustees like Phil and Mary have structured their investment and income strategies around this policy.
So, for Phil and Mary, it will mean going back to the drawing board. A part-pension, which will be payable once their assets fall below $837,000, will be very much an option. Indeed, there will be an incentive to see how they can maximise what they can legitimately claim from the public purse. A small age pension, even of $10 per fortnight, could be worth many thousands of dollars in refunds of excess franking credits.
From the SMSF Association’s perspective, Labor’s proposal is bad policy for several reasons.
First, Labor already has acknowledged flaws in its scheme with the announcement it will exempt people receiving the age pension from its changes to refundable franking credits. As the association said at the time, it was a “step in the right direction”, but we still had “serious reservations” about the fairness and efficacy of this amended policy.
Second, the fact the ALP has already amended the policy suggests the revenue “hit” of $55 billion over 10 years is likely to fall far short of that. The simple fact is that claimed savings will be offset by more people moving access to social security, as well as behavioural responses to the proposal.
The Phil and Marys of the world have options, including adding extra members with taxable contributions to their SMSF fund, reducing their net assets to claim a part-pension, or a change in asset allocation. If they adopt the latter option, there is every likelihood of increasing the level of risk in their portfolio in the hunt for yield to replace the income now delivered by their fully franked shares.
Remember, too, that the $720 billion SMSF sector, with an asset allocation of more than 30 per cent to domestic shares, has helped bring stability to the share register of blue-chip stocks. Most retirees are long-term holders, willing to ride the investment cycles for the income these stocks deliver.
Third, Labor’s proposal again moves the superannuation goalposts, a move that can only further sap public confidence in our compulsory retirement savings system.
A recent Roy Morgan survey showed the proportion of people making contributions beyond the compulsory level (9.5 per cent) has fallen from 25.5 per cent in 2010 to 20.8 per cent, a clear sign of super’s waning appeal as the primary retirement savings vehicle. And Labor’s proposal runs counter to the new objective of superannuation, currently being legislated, to encourage greater self-reliance in retirement for super to substitute or supplement the age pension.
No superannuation policy should be set in stone. But policy changes should only be introduced after strenuous public debate and, where possible, with bipartisan support. Tragically, that debate and bipartisanship has been sadly lacking, with ad-hoc policy-making, driven primarily by the need for revenue, being the order of the day.
This is not what was envisioned when stable compulsory superannuation was introduced in 1992. It’s time we returned to the goal of having a retirement savings scheme that affords every Australian the opportunity to a secure and dignified retirement. Phil and Mary deserve no less.