Will the government apply a (capital) tax to this attractive amount sitting in Australian superannuation balances; or, in other words, nationalise it?

Can superannuation be simplified or do we learn to live with ever increasing complexity?

What impact will matters such as inflation, lifestyle uncertainties, medical uncertainties, investment returns, have on our general way of life?

Will global financial crises become regular events, or deeper?

Are our growth stocks and property around the world overvalued?

Borrowings by the United States Government are not sustainable. When the rest of the world agrees with this, what effect will it have on all of us?

In these difficult circumstances, will the superannuation pension/drawdown you are planning last from retirement to the inevitable celebration of your life?

One thing we do know is that cost of living increases can be difficult to budget for and are certain. They are like death and taxes.

It may be that the assumed increasing life expectancy may moderate or even reverse in the future. Regardless, the expense of keeping ageing bodies alive will clearly increase in real terms.

Hospitals become more expensive, the treatment costs increase, antibiotics are becoming less effective and their replacements are more expensive. Perhaps viruses and bacteria will evolve into more seriously dangerous life forms.

The impact of increasing population throughout the world could have a negative impact on our standard of living.

It may be that increased life expectancy will be available only to the top one or two per cent of the population capable of insulating themselves from the likely changes ahead; those who are less likely to join the increasing number of people on or below the poverty line.

With the many changes happening around us, the task of successful financial planning for longer lives becomes difficult and uncertain for everyone no matter whether they are in government or some other sector of the community.

Our conclusions

Without a crystal ball to help us, what can be said with some certainty about the future outlook for people approaching retirement?

• We think that Government assistance will always be required for the very old. More assistance will be required with increasing longevity
• Superannuation would seem the most effective strategy to achieve financial security.
• Existing taxation treatment and legislative protections for superannuation funds need to be increased.
• Taxes overall will have to increase for this support and the retirement age will have to increase.
• Superannuation arrangements must certainly be improved – to ensure that we are able to enjoy a reasonable lifestyle.
• There will always be a need for government support for some retired people. This will increase and therefore:

This rather gloomy picture is fundamentally due to our assumption of an ever increasing life expectancy. As we have pointed out there are factors which we have to take into account. It is obvious that we need to be conservative with our future investment assumptions.

None of us know how long we live. That is a good reason for the Government to reduce the Australian dependence on the Aged Pension. Compulsory superannuation was Introduced to reduce the massive liability the Government has with the Pension. The problem has now been transferred to Australian Citizens.

How long will we live for?

Actuaries can estimate what will happen to a large group of men and women. The individual life expectancy is a great unknown. Currently, the life expectancy for a male aged 65 is close to 20 years and 23 years for a female. Self Managed Superannuation Funds (SMSFs) can be built around this. However, if you expect to live to 100 because both your Mother and Father lived to 100 then you may need to keep working until you are close to 80!

The Personal Perspective

According to the September 2019 Self Managed Super Fund Magazine (https://smsmagazine.com.au) the average pension payments from SMSFs was:

2019 $68,215

More up to date information is available for the Australian Pension for couples

2021 $37,923

As we all should know, the pension reduces as the level of private savings and assets increases. Pensioners with SMSFs live a better lifestyle and are not financed by Government.

If you own your own house and have a particularly simple lifestyle, it is possible to live on the pension. It means no overseas trips, no visits to good restaurants, strict budgeting and always looking for the cheapest items in the supermarket.

Nevertheless it is government policy to reduce this dependence on the public purse by encouraging people to save for their future – and for this they receive a tax benefit.

It is not government policy to encourage luxuries on the pension. The exceptions are politicians and judges, who can afford luxuries from their generous government-funded pension schemes. For the rest of us, any improved lifestyle comes from the superannuation fund we build before retirement.

Here’s a simple illustration. Assume a retirement balance of $1 million. Every year for 20 years $50,000 can be taken out as a pension (ie a capital drawdown).

The superannuation fund can earn about 5 per cent. Inflation is assumed to be around 3 per cent. The remaining 2 per cent, or $20,000, in the first year is a bonus for holidays, upgrading cars or reinvesting. The amount equal to inflation should be reinvested so that the drawdown keeps up with inflation. A balance of $2 million will result in a lifestyle of $100,000 every year. Alternatively, it may keep retirees going for more than 40 years on a $50,000 lifestyle.

Some financial investment analysts suggest long-term returns averaging 7 per cent may be possible. Remember high returns and high risk go together.

Risks to Australian Superannuation Policy

This simplistic example gives a good picture of what to expect. If you would like a more complicated example, make an appointment with your expensive actuary.

The concern we have concentrated on is:

Financing longevity

There are others:

How will future Governments react to a large poole of Superannaution.
How many Covid 19s are waiting for us.
What do our Asian neighbours have in mind. The largest one will cause the largest problems.

If you would like to read a small treatise on Risk please read SMSFs and Risk

Living in Retirement

Introduction

Superannuation is a popular media topic. Huge financial figures are headlined. Frequent comments are printed about potential change. This always implies changes to taxation. Or to put it more simply, a reduction in your standard of retirement living.

Invariably there are comments about about Government Policy favouring one group or another. This can be seen as part of the Australian tall poppy syndrome. It can also be related to improvements in welfare. The next step from using Superannuation to live in retirement is to consider what happens when we need help in living in retirement.

The latest estimate of population in Australia over 70 from the Bureau of Statistics is 2,336,596 as at 30^th June 2014 (2,194, 389 as at 30^th June 2012) and increasing. Superannuation is important to an overwhelmingly large number of this population. A substantial proportion of the population is receiving (and increasing numbers will receive) Aged Residential Care. This is referred to in bureaucratic circles as Beds. Sometimes referred to as Aged Care Places. A better description would be Living Spaces.

According to a study based on the Australian Government’s Annual Aged Care Census the number of Aged Care places in 2012 was 184,993.

So we have an indication of a large demand probably not being met. The possible connection between Superannuation and Aged Care does not seem to receive much attention. The fact that there are a lot of people looking after themselves is a tribute to the Australian Population.

Aged Care Accommodation

There is a big industry supporting Aged Care. Some of this industry is Government Bureacracy. So that means it is complicated. To simplify it we divide it into these categories knowing that there are many grey areas.

1. High care residential (formerly known as nursing homes). It is for people who find it difficult to look after themselves

2. Low care residential (formerly known as hostels). For people who can look after themselves most of the time. It can also be temporary or to provide respite . These two additions are two of the grey areas.

3. Home based care (relatively new) An increasingly popular alternative with visits from health professionals, assistance with their domestic needs,(cleaning/ laundry/ house and garden maintenance/ meals, and similar assistance). It is good for people whom with assistance can continue to live in their home.

4. Retirement Villages (sometimes combining all 3) can also be relatively low care.

Generally speaking the categories are subsidised by the Government. The higher the level of care/support the greater the Government subsidisation. Increasing costs are inevitable both from increasing demand and higher unit costs of looking after the Aged Care spaces. Changes to the funding arrangements are always being considered to reduce the drain on the taxpayer. The important consideration is that we (the taxpayer) will be looking for some sort of sympathetic accommodation as well. Retirement Villages are not subsidised by Government – except for some home care which may be provided to some residents.

There are two ways of looking at these costs. The first is the obvious one of what will it cost the individual? The second is what is it costing the taxpayer? There may not be a direct linkage but the Government Policy will always effect the costs to the individual taxpayer.

Financing Aged Care

First an obvious disclaimer. Lifestyle villages for people 45 years and over are not being considered. Lifestyle villages are for fit people who want to live in holiday mode all the time. It takes the place of owning a home.

Costs will be higher for higher care. Government subsidies also increase to attempt to keep the costs to a reasonable level.

Financing Retirement Villages and Residential Care

People are only too aware that getting older can be a minefield. The first things springing to mind are Finance and Health. Lifestyle is connected to both. Care is also a significant factor. There is also the adult (and at times dependant) offspring that have a major interest in their parents’ retirement circumstances.

The move to a retirement village can be appealing as a “downsizing” and a different lifestyle option.

However, there are costs to consider:

There are regular monthly facilities levies. A suitable representative figure would be around $400. Most residential living costs would continue to be met by the retiree. It depends on the circumstances of the residential agreement  with the corporate management of the village

Financing the move to a village would normally come from the sale of the family home. When the family house is sold it should pay for a unit in the village . Assume the cost of a unit (noting that it has probably been lived in before but will be in good condition) is $400,000. When the unit is eventually sold the first 30% of gross sale proceeds are retained by the corporate management of the village. This helps to pay for the refurbishment of the unit and a profit margin for the village management.

e.g. if unit is later sold for $400,000 then 70% of the sale price of $400,000 is $280,000 less selling commission(say $22,000) The amount returned to the retiree is a net $258,000.

Residential Care

Financial rules are very complex and can vary significantly depending on personal health and financial circumstances , including eligibility for the aged pension.

Accommodation bonds are requested by each facility. In Western Australia they can vary from between $200,000 to $690,000 per resident.

Any shortfall in the accommodation bonds requested is charged as a daily fee with the amount calculated using a set interest rate – currently 6.23% pa.

Other fees can include:

1. Basic Fee currently $47.20 per day – calibrated as 85% of the single daily pension. It is payable by all residents.

2. Means Tested Fee – A daily fee payable by residents. Centrelink  determines the amount of fee to be paid based on their assessment of income from all sources plus assets. This is a complex area particularly regarding assets -including the family home if it has not been sold nor occupied by a dependant. 

3. Extra Services Fee can be charged by some facilities which provide additional services (other than medical services) for residents. This can be paid ‘upfront” as a bond,e.g.$330,000 or as a daily fee calibrated at an interest rate set by the facility, eg.4.2% on outstanding amount of bond.

Generally, the higher the amount of the accommodation bond the better the standard and amenity of the accommodation, general services and food.

The base line level of essential medical care is universally applied irrespective of individual financial circumstances.

The Extra Services Fee provides residents with additional comforts to feel more like a guest in a high quality private hotel rather than a patient in a hospital facility.

The extent of superannuation income and assets will determine the standard of non medical care in your golden years.

Please note: Some general information for this “Insight” came from an Article entitled Residential Aged Care Policy in Australia by Baldwin, Chenowith and dela Rama in the June 2015 edition of the Australian Journal of Public Administration. Information was not copied

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