Australia's Future Tax System

Retirement Income Consultation Paper

5. A simple and approachable retirement income system

The accumulation and draw down of retirement income requires individuals to make choices about the type of contribution to make, the best way to take their superannuation, and to consider the effect additional work will have on their income. The ease with which individuals can make the right choice is a mark of how simple the system is. The complexity of these decisions is influenced both by policy design and the design of superannuation products.

Summary of key messages from submissions

Some submissions discuss the need to simplify the way retirees interact with the tax‑transfer system. They argue retirees must provide similar information to both the Australian Taxation Office (ATO) and Centrelink, which adds to their costs.

A number of submissions express a view that the means testing arrangements are complex and intrusive.

Some submissions argue that improving the financial literacy of households is necessary, particularly in managing their retirement income. Educating workers and retirees about the level of saving they will need for an adequate retirement income is also proposed.

A number of submissions recommend making financial advice more affordable, via tax rebates and/or deductions, to encourage more individuals to educate themselves about retirement matters.

A submission used the example of the pensioner tax offset to illustrate some of the complexity that exists in the concessions paid to retirees. This is outlined later in this section.

Some submissions claim efficiency gains would occur if the services delivered by various government departments (at the Australian, state and local levels) and by not‑for‑profit organisations could be streamlined. One proposal is to combine the social security and tax systems for those aged 65 years or older.

Superannuation products and the role of advice

Individuals now have a greater responsibility than in the past for providing their income in retirement. Many find it difficult to make decisions today that will affect their wellbeing in 20 to 40 years time. Developments in financial markets over the past decade have significantly increased the number of investment products, many of which are very complex. These products are now part of the broader retirement income system.

Superannuation funds have developed from offering a simple 'one size fits all' product, to most now allowing members to make decisions on how their money is invested. On average funds offer 38 investment choices (Australian Prudential Regulation Authority 2008). Some offer significantly more, with five offering more than 300 investment options to their members. However, most individuals choose the default investment strategy of the fund.

Research suggests many Australians find financial investment and superannuation difficult to understand. Further, evidence of low levels of financial literacy is widespread, particularly among specific demographic groups, such as those with low levels of formal education.

Individuals with little knowledge of basic financial concepts often exhibit inadequate personal financial management, including poor borrowing behaviour and a failure to plan for retirement. These individuals may also be more likely to use financial products to bring forward expenditure, on the basis that the debt can be paid by their superannuation. This strategy can significantly affect their future income.

Submissions promote financial advice as a way to improve retirement outcomes and propose making this more affordable through tax concessions. Broader education may also be effective in making it easier for individuals to make the best choices for their retirement.

The effect of superannuation concessions on decisions

The removal of tax on most superannuation benefits has simplified the taxation of benefits. However, situations remain where individuals make decisions they believe are correct but do not provide the best result.

Individuals can make before and after‑tax superannuation contributions. Before‑tax contributions are deductible while after‑tax contributions are not deductible, but may be eligible for the government superannuation co‑contribution. This distinction can make it difficult for individuals to decide how best to make additional contributions.

For example, an individual who has a total income of $40,000 a year from wages and wants to make a contribution of $1,000 should invest around $678 as an after‑tax contribution and the rest as a before‑tax contribution (for example, as salary sacrifice) to maximise the concessions available to a contribution of this size. Deciding whether it is worthwhile to split contributions with a spouse can also complicate retirement planning.

Decisions in retirement

For many individuals, retirement is the first time they will have their financial affairs considered by Centrelink and the ATO. One submission questions why retirees must give similar information to the ATO if this has already been given to Centrelink. Others suggest streamlining the roles of these organisations for retirees.

Notwithstanding the tax exemption for superannuation benefits, many individuals aged 60 years or older still lodge a tax return in respect of their other income. One submission outlines the complexities of the pensioner tax offset. This offset is calculated using many variables, including whether the pensioner is single, widowed or separated. The submission goes on to say that couples need to consider if one is in a nursing home, whether they are a veteran, war widow or war widower, whether they have lived apart due to illness, whether their taxable income is more or less than a specified amount and whether any unused tax offset can be transferred to their spouse.

Individuals must satisfy age, residence and means test requirements to receive the Age Pension. They must also meet proof of identity requirements. Detailed information is sought from applicants to establish whether they meet these rules, which are administered by Centrelink.

Couples are jointly assessed under the means test. Applicants without previous contact with the social security income support system may be unfamiliar with the income and assets test rules. The complexity of an individual's or couple's circumstances largely determines the complexity of the claims process.

Some individuals claim the Age Pension when they reach Age Pension age. Many transfer from another income support payment such as Newstart. Some claim the Age Pension after they reach Age Pension age, for example because their income and assets have decreased to a level that allows them to access the Age Pension.

After an Age Pension is granted, individuals must advise Centrelink, generally within 14 days, of changes in their financial and other circumstances that may affect their entitlement. These are ongoing notification requirements, unlike requirements in the tax system, which are largely confined to annual reports about the previous financial year. The social security notification requirements ensure an individual's assessed income and assets are adjusted quickly in response to changes in circumstances, thereby ensuring their pension rate reflects their current need.

Consultation question

Q5.1 In what ways does the retirement income system impose undue complexity and cost on retirees and workers? How could this complexity be reduced?