Don’t base objective for super too much on age pension

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legislated objective for superannuation, Tax Institute, Financial System Inquiry, submission, age pensionThe Tax Institute has warned against linking a legislated objective for superannuation too strongly to the age pension.

The Government has been consulting on setting an objective for superannuation in legislation, following from a Financial System Inquiry (FSI) recommendation.

The FSI proposed “to provide income in retirement to substitute or supplement the Age Pension” as the objective for superannuation. But the Tax Institute says this is “too narrow by reason of its overreliance, by inference, on the Age Pension”.

“The Tax Institute submits that an objective that aligns adequacy to the Age Pension would be inappropriate and would operate as a general disincentive to superannuants to save for their retirement. In those circumstances taxpayers would be likely to look to savings outside of the superannuation industry to support them in their retirement and over time there would be a risk that one of the key pillars upon which the system was established, voluntary superannuation saving, would be left to fail.”

While the Tax Institute “broadly agrees” with the primary objective as set out by the FSI it says the objective for superannuation should be based on an “optimal income stream”, not the “minimum” income stream provided by the Age Pension.

The Tax Institute is also concerned that setting a primary objective for superannuation may have unintended consequences.

“For instance, the primary objective (even when taken with the stated subsidiary objectives) would not clearly contemplate many of the kinds of benefits that are currently available to superannuants (and in certain circumstances, their dependants) such as lump sum payments on death and permanent disability, reversionary pension arrangements for a spouse and/or dependent child, terminal illness benefits, salary continuance benefits, transition to retirement pensions, financial hardship and compassionate grounds payments.”

“If it is proposed that enshrining the primary objective of superannuation into legislation would affect the availability of these benefits going forward then the Tax Institute considers that a further review into which currently available benefits might be cut-back or excluded is required.”

The Tax Institute submission recommends that the objective for superannuation be placed in a separate piece of legislation.

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