Nick Bruining: Beware! There a sneaky political agenda in the push to get more retirees into annuities

Make no mistake, pressure is building to steer more Aussies into taking out an annuity when they retire. And while there’s a compelling argument to provide a secure and stable income for life, the underlying agenda should not be ignored. That agenda is an attempt to quash the secondary, and sometimes more important, use of superannuation for many Australians — to provide a substantial tax-effective bequest to their loved ones when they die. Well-heeled Aussies are smart enough to work out that super is a vehicle that allows you to build a substantial portfolio of assets in an environment where much of that money is entirely tax-free. At worse, it is taxed at 15 per cent, which is slightly lower than the lowest marginal tax rate. While the move to tax super balances in excess of $3 million an extra 15 per cent has been thwarted by crossbenches for now, the Federal Government has made it clear the issue is not dead yet. If successful in the next election, it will be high on the agenda for a re-appearance during the next term. Someone retiring later this year is likely to be able to roll $2m into an income stream product like an account-based pension, with the current transfer balance cap of $1.9m likely to increase on July 1. Once in an ABP, the earnings within the fund are entirely exempt from all tax. Similarly, all payments and withdrawals are entirely tax-free. Bring in a partner and their combined total is $4m. For a 65-year-old couple, the minimum drawdown required would be 5 per cent of the balance, or a combined $200,000 a year, again tax-free. Putting it in perspective, that’s the same after-tax income you would receive if you each earned $133,000 pre-tax from employment or out-of-super investments. It’s highly likely that a person or couple in that financial position is likely to be entirely debt-free, meaning that all of that income is available to spend. And here’s where I’ll let you in on a little secret. There’s plenty of boomers who have thrift embedded in their DNA. They don’t like wasting money for the sake of it. While they’ll fly business class when they travel and update the car when there’s a new model released, the older you get, the harder it is to spend the money. That’s before we take into account the physical limitations of a buggered hip or arthritis that just hurts. And in the face of great adversity and sadness, like the diagnosis of a terminal illness, there are undeniable financial benefits. If the money in super is withdrawn from the super environment before death, all tax is avoided. Not one cent is payable to the government. No wonder the government is keen to see your money locked away in an inaccessible retirement product like an annuity. Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association