Not refunding franking credits can reduce retirement savings by 15%

Stopping the refunding of excess franking credits could reduce retirement savings by 15% over 20 years, a new analysis has concluded.

SuperConcepts has done a 20-year projection of someone aged 65 with a $900,000 SMSF balance – the average SMSF balance for someone of that age – receiving the minimum pension payment for that amount of $45,000 a year. The analysis found their retirement savings would be 15% worse off after 20 years without refunding excess franking credits.

Peter Burgess, SuperConcepts general manager of technical and education services, said the data is “very confronting”.

“Our data analysis supports a view that the Federal Budget will receive much less than the projected $55 billion over 10 years from this measure and that the budget savings will not come from high net worth individuals, rather it will come from the lower end of the income spectrum,” he said.

The SuperConcepts analysis indicates that after 20 years the balance would be $953,480 with refundable franking credits or $825,519 without – a difference of $127,961. This was based on a number of assumptions, including a 40% allocation to Australian shares, 3% capital growth and 4% income return.

“This equates to a significant impact on the fund’s earning rate and the total income received per annum,” said Mr Burgess.

In the first year of the comparison the income received with franking credits is $36,771 compared to $30,600 without refunded credits – a difference of $6,171. This income differential grows over time, by 5 years it is $7,631 a year and 10 years out it is $9,207.

“As a consequence, after 10 years the member’s minimum annual pension entitlement would reduce from $60,756 to $56,762 and after 20 years from $88,298 to $76,991.”

“This is due to their retirement phase benefit being replenished at a lower rate as pension payments are made, resulting in a quicker depletion of their superannuation assets. While the member in this example could increase their pension payments above the annual minimum requirement, this would accelerate the depletion of their capital and increase their dependency on the age pension at an earlier age.”

Mr Burgess said it was worth noting that the introduction of the Transfer Balance Cap would limit the impact of removing refundable credits on larger SMSFs – as credits could be offset against the taxable income in accumulation phase.

“This is an important point because it means SMSF members with a total superannuation balance in excess of the general transfer balance cap (currently $1.6 million) may not be impacted, or the impact from removing refundable franking credits, will be much less than first anticipated.”

“In other words, the projected budget savings of $55 billion over 10 years is unlikely to be realised and much of the revenue that will be raised will come from the superannuation accounts of members which much smaller superannuation balances.”

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