CPA calls for lifetime limit on superannuation lump sums

Nest egg, superannuaiton, SMSF, retirement
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CPA limit superannuation lump sums, Financial System InquiryCPA Australia has called for a lifetime limit on superannuation lump sums, among other recommendations in a second-round submission to the Financial System Inquiry.

Limit superannuation lump sums

CPA said in the submission that people need to be encouraged to take income streams in retirement instead of lump sums. However CPA does not argue for prohibiting lump sums, pointing out that lump sums can be useful during retirement.

Instead CPA recommends that a lifetime limit be set for lump sums, with the taxable component of any lump sums above the threshold taxed at a higher rate. CPA suggests $250,000 as an appropriate lifetime limit for lump sums.

In order for such a policy to be effective there would likely need to be changes to the rules for account-based pensions. However these are not discussed in the submission.

CPA does say that the minimum annual drawdown limits may need to be re-considered, to reduce longevity risk.

Superannuation policy

CPA says that the superannuation system needs a “clear vision for the future”, otherwise it will drift from it’s purpose and may become a “compulsory form of wealth creation with associated tax concessions.”

“Unfortunately, successive governments have viewed Australia’s superannuation savings as a ‘honey pot’ to dip in to when required.”

According to CPA submission these constant changes to the superannuation and tax rules have damaged public confidence in the superannuation system and risk the future of Australia’s retirement savings.

CPA says that superannuation needs to be “removed from the political cycle” and recommends the establishment of an independent organisation to set retirement policy.

SMSF borrowing

The Financial System Inquiry interim report expressed concern with SMSF borrowing, and asked for thoughts on returning to a ban on leverage by super funds. In response CPA has said that such concerns are “premature and influenced by the recent attention focused on the increase of SMSFs borrowing.”

CPA believes that the issue is not SMSF borrowing itself, but inappropriate advice provide by unlicensed advisers, including real estate agents.

The solution to this issue, according to CPA, is that property advice be made “regulated investment advice.”

“Only after the immediate problem of inappropriate advice is addressed can the true impact of leveraging on the superannuation system be considered,” said CPA.

Limitations on establishing an SMSF

CPA says that “there is no justification for imposing a minimum monetary balance” on setting up an SMSF.

However, the submission does say that there could be benefits from publishing an “educative guide” which would include a recommended minimum balance and cost assumptions to assist potential SMSF trustees to understand the “break-even concept.”

CPA also notes that there may be reasons for people to decide to set up, or continue, an SMSF even where it has higher costs than alternatives. Such reasons include holding business premises or because the members are planning on increasing the size of the fund over time.

The Financial System Inquiry is due to report to the Treasurer in November.

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