This month the treasury released the 2021 Intergenerational Report, which purports to project an outlook for the economy and the Australian government budget over the next 40 years. The good news is that our population will continue to grow, albeit at a slower rate, which is positive news for both the property market and the share market.
The bad news is that there will be just 2.7 people aged between 15 and 64 for every person aged 65 and over.
Within 40 years, the life expectancy of the average male will be 86.8 and for a female 89.3 years. The population will be almost 40 million and include more than 50,000 people aged over 100. In short there will be less taxpayers providing revenue to support an increasing number of retirees. This imbalance will get worse as the ratio of dependants to workers grows over time.
Our compulsory superannuation system continues to provide major support for the economy. At March 31, 2021 superannuation assets were running at around 157 per cent of GDP - this is projected to grow to around 244 per cent of GDP by June 30, 2061.
The forecast is that almost 75 per cent of those of funds will be held in the accumulation phase as the baby boomers die, and the large amounts currently held in pension phase are withdrawn and unable to be replaced due to the tightening of contributions. The benefits of our superannuation system will really show value in the next 40 years.
Even though people are living longer, and there are less people to pay the taxes to support the elderly, the total number of Australians of pensionable age is expected to double to over eight million while the proportion of people of pensionable age is expected to decline in the same period. The other side of the coin is that expenditure on age care will be skyrocketing.
A budget surplus is many years in the future, which means there will not be the funds available to splash money around. A major problem is our taxation system. Currently, 61 per cent of personal income tax is received from a mere 11 per cent of Australians, leaving the bulk of taxpayers contributing very little. Plus, 87 per cent of those aged 65 and over pay no tax whatsoever.
Think about a single-income couple with two children aged 14 and 16, where the primary breadwinner earns $80,000 a year. The income tax on this would be around $16,000, but the family's contribution to the national coffers would be just $9000 after family payments of $8000 a year are taken into account. If we assume the cost of the full aged pension for a couple is $40,000 a year when healthcare concessions are factored in, it will take at least four such single-income families to support one pensioner couple.
A full review of our tax and welfare system is overdue with a total overhaul of the GST at the front of the agenda. But the adversarial nature of politics does not make for optimism. Right now, the federal government reminds me of a dysfunctional family. Dad and mum (the two major parties) spend all their time abusing each other and promising the world to their constituents (us, the children), while well-meaning but inexperienced relations (the minor parties) add to the turmoil by telling the kids that their parents don't know what they are talking about.
Until they all get their act together, and unite with a common goal to get our country's finances in order, it will continue to be all talk but little action.
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Noel answers your money questions
My relative is on Level Four HomeCare Package and currently getting the full age pension. Suppose he starts to receive some income and puts this income towards his home care package to get extra home care service. Will this affect his age pension ?
Aged Care guru Rachel Lane says that the income he earns will be assessed for calculating his pension and the amount he needs to contribute towards his home care package through the Income tested care fee. As a full pensioner no income tested care fee is currently payable, and certainly there is a level of income he can earn before his pension would reduce, as a single person that's $178 per fortnight.
The income tested care fee is calculated using his pension plus other income, and if that is less than $28,049 per year he won't pay an income tested care fee. If he earns more than this the income tested fee will be charged at 50c per dollar above the threshold.
It's important to know that not all income is real income - the most common form of income for pension and income tested fees is what's called deemed income - what Centrelink say you earn on your investments regardless of the actual income they produce - currently the deeming rates are 0.25 per cent on the first $53,000 of investments and 2.25 per cent on the amount above. If he earns more than the deeming rates from his funds it won't affect his pension or his income tested care fee
We have a home in joint names that we lived in for over 10 years but is now being rented. We plan to sell the house before we both turn 74. Can we sell this property under the downsizing rule and put up to $300,000 each into our SMSF, even if this is not now our main residence?
The government ATO site states that the property must be your main residence before you are eligible under the downsizing rules.
John Perri of AMP Technical has good news for you. The home you intend to sell is an 'eligible property' according to the downsizer contribution rules, as it was your 'principal place of residence' at some stage in the ownership period (10 years in this case).
This is important as the property being sold has to be either fully exempt from CGT (ie, because it was a principal place of residence at all times) or partially exempt from CGT (ie it was a 'principal place of residence' for some of the time of ownership).
Provided you meet the rest of the eligibility rules, you should be eligible to use the downsizer contribution rule, which permits up to $300,000 each of the sale proceeds to be contributed to super as a downsizer contribution.
I am 61 years old and retired since last year, my husband is 58 years old and still working with an annual salary of $120,000. He is currently sacrificing around $100 per week. My super balance is $700,000, my husbands is $600,000. We own our home .
I have read a few articles about the pension stream account and not sure what we should do to maximise our tax situation. I am thinking of switching my super to the pension stream income account to avoid 15% tax on investment earning. But at the same time, I am worrying the minimum super draw down of 4% might impact the earning. Could you please advise us the best way I should do for our situation and also what are the pros and cons to switch from my accumulate account to pension income account? Can I keep some in my accumulated account or I have to roll over the full balance amount to the pension income account?
If the funds are kept in accumulation mode they will be subject to 15% income tax, but there is no requirement to make minimum withdrawals. If they are in pension mode the fund is a tax-free fund, but there are mandatory withdrawal requirements. The government has just announced that the reduced minimums will be in force for the next financial year which means the required drawdown will be just 2% for the next 13 months. There is no requirement to have all of your fund in pension or accumulation mode. You can choose what is most effective, and then make other changes as years pass.
Could you please give some information on the requirements for the trustees of a SMSF that holds an illiquid asset (such as a property) in the event of the death of a member of the fund?
The trustees may need to realise the property to meet the death benefit payment obligations, so it's important to get advice as the situations will vary. For example, if the payment of the death benefit will not create a tax obligation such as a payment to a surviving spouse, it may be possible to meet that obligation by transfer of the property. If not, the property may need to be sold which can take time. Possibly members may be added, or contributions made, to enable retention of the property.
It's important to start planning for these events well in advance - especially if it's a significant family asset such as a farm. Any delay may need to be documented and explained as usually death benefits are paid quickly.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: firstname.lastname@example.org