Self-funded retirees could be worse off by more than 17 per cent compared with other retirees on the part pension under Labor's proposal to end cash rebates for excess franking credits, according to modelling.
The independent analysis, verified by consultant and financial adviser William Buck, is based on a self-funded retiree couple with assets of $1 million managing a portfolio of Australian shares compared to a couple on the age pension with assets of $840,000 (just below the age pension cut-off of $848,000).
It finds the self-funded couple wholly invested in Australian shares (earning up to 4.5 per cent in dividend income) currently receives $45,000 plus franking credits of $19,285 – total income of $64,285. The high exposure to Australian equities is a common strategy for self-funded retirees who manage their own portfolio.
But under the proposed Labor changes the self-funded couple's annual income would drop from $64,285 to $45,000, a cut of almost 30 per cent.
The other couple also have their assets invested in Australian shares generating 4.5 per cent. They are not affected by Labor's proposals and will receive $37,800 and retain their franking credits of $16,199. They receive a part age pension of $157 each per person a year, bringing their total annual income to $54,313.
"[Under the Labor changes], the self-funded couple will have $9,313 (or about 17 per cent) less income than the pensioner couple who have fewer investable assets," says retiree Russell Lea. Further, the couple on the age pension will also receive the federal government pensioner concession card that is worth more than $2000 a year in additional benefits.
Mr Lea, and his wife, Jean, both 75, who saved all their working lives to fund their own retirement, say Labor is treating SMSF retirees "like second-class citizens".
Up in arms
"Retirees are up in arms," says Lea, a former journalist, newspaper manager and small business owner. "My generation has gone to the trouble of working hard and saving for our retirement. At this late stage in our lives, the rules are being changed to our disadvantage. It is not fair."
A couple in this situation would need to reduce consumption sharply, use more of their investment capital to offset lost credits or consider a riskier investment strategy, say advisers.
An alternative strategy cited by many self-funded retirees is spending more on holidays, renovations or luxury goods to reduce their savings below government pension thresholds
In that way they could receive a part pension and retain full franking credits without losing income.
Barbara Smith, an award-winning accountant who has written more than 30 books on SMSFs and superannuation, adds: "A lot of retirees are angry and confused. They don't understand why they are being penalised for choosing an asset class like Aussie equities. They don't have the capacity to earn other income, and have arrange their lifestyle and accommodation in line with their retirement income."
By contrast, self-funded retirees in, say, fixed-income mortgage products, are exempted from the rule changes.
Self-funding problem
Smith has a client with $1 million in super invested in Australian equities. A grandmother in her seventies, she was widowed young and raised three children as a single parent and "worked hard to self-fund her retirement", says Smith.
"She keeps little cash, lives on dividends and uses the franking credits as a lump sum to fund her annual holiday and council rates. As her income will fall by 30 per cent, it looks like she will have to cancel the holiday. She is stressed and does not know how she will manage to pay her bills," says Smith.
Lea says younger retirees – and those coming up to retirement – are considering cutting back their super savings or spending large amounts to qualify for the state pension and other concessions.
"This new Labor policy goes against the spirit and impact of the original reforms introduced by the Hawke-Keating governments in the 1980s that encouraged people to look after their own retirement and ease pressure on the state," Lea says.
He has no plans to blow a lump sum on renovations to reduce his savings below the pension thresholds because he could lose his seniors' card (if he changed an account-based pension), which entitles him to about $10,000 a year for medical treatment and medications.
"But lots of others will," he says. "If this strategy is adopted on a large enough scale, pressure will be applied to the old age pension system."
A survey by Plato Investment Management, which has about $4.5 billion under management, reveals that more than 40 per cent expect to be more reliant on the age pension if the changes become law.
Plato surveyed its client base, largely self-funded retirees. More than 1400 responded. More than 90 per cent believed it would reduce incentives to save for retirement.
Age pension attraction
Other modelling, by Plato, supports claims that self-funded retirees close to the current pension assets tax maximum for singles and couples will be better off spending those excess assets to qualify for a part pension and full refund of franking credits.
A future Labor government's policy is expected to affect about 1 million individuals, in addition to superannuation funds, and raise about $59 billion over 10 years.
Only four of the top 15 seats for the average size of franking credit refunds are held by Labor, which suggests the Opposition could ignore increasing lobbying to amend, or withdraw, the changes.
Don Hamson, managing director of Plato Investment Management, says: "We believe it is regressive, increases uncertainty, complexity and self-funded retiree stress levels. It also discriminates between superannuation funds based on member age, reduces incentives to save and is unlikely to generate the level of net savings the ALP predicts."
By Duncan Hughes
Financial Review
5 February 2019