Why super 'sharing' by spouses would be more fair
Rules that would allow couples to equalise their balances could help rectify the gender gap.
The Retirement Income Review has the potential to materially reshape our superannuation system by providing the raw data on which policymakers, regulators and the industry can make future decisions.
The review was always going to be a significant document. But for self-managed super fund trustees dealing with a coronavirus-induced recession, volatile equity markets, dividend cuts, historically low interest rates and questions about property investment (both retail and commercial), it could be particularly important.
This is because the review has the opportunity to provide the foundation stones for policy changes that will improve superannuation for SMSF members in these difficult times. There is no better example of this than implementing an effective spousal equalisation policy, or, as it’s more quaintly put, spousal rollover.
Where appropriate, superannuation should be viewed from the perspective of a “couple”. The majority of SMSFs fall under this umbrella, so to view members of an SMSF as individuals and not a couple seems illogical.
Throughout their working lives most couples have made mutual decisions about employment, children’s education, investment, housing, holidays etc. The list is endless, yet in retirement they are viewed through an individual prism.
This state of affairs was heightened with the introduction of the transfer balance cap (TBC) – it took effect on July 1, 2017 – and the lack of opportunity for couples to adjust to its introduction where most have balances heavily weighted to one member (typically the male).
As has been well-documented, women, on average, retire with less superannuation than men – an ongoing issue for the super system. There are myriad historical reasons for the difference, but the fact that men are more likely to have uninterrupted work patterns and the gender wage gap are the main factors contributing to them having larger and more consistent compulsory contributions.
What is required are fund member balance equalisation strategies to ensure that couples can equitably navigate the $1.6 million TBC, improve their retirement income and death benefit plans, and potentially access other benefits associated with having more equal superannuation balances.
Let’s take two examples (see table). In the first, under a spousal equalisation policy both members would be able to access the concessional catch-up contributions as they would have balances below $500,000. The couple would not be penalised by having one individual sacrifice their working arrangements over parts of their career resulting in a lower balance in retirement. In addition, they would not need to engage in a re-contribution strategy.
In the second example (where one spouse is retired), both members of the fund would remain under the TBC and avoid the complexities of administering savings held in both retirement and accumulation phases. Spousal equalisation would also reduce the complexity in death benefit plans where one individual has a significantly higher balance than their remaining spouse. In addition, tax components would remain intact rather than the higher-balance spouse potentially removing large taxable components of money through a re-contribution strategy.
As both these examples highlight, the proposal for an effective spousal equalisation policy is intended to rectify the superannuation gender gap. Removing inefficient and ineffective measures that prevent members from splitting their account balance and allocating some to a spouse should be encouraged.
In essence, a spousal rollover would provide a simple and efficient mechanism where couples approaching retirement are engaged and are able to plan for their de-accumulation of assets.
By being able to pool their superannuation it means that both partners will be cognisant of the family finances and can work together to budget more efficiently, implement considered investments and facilitate simpler death benefit strategies. Superannuation fund retirement projections would be more accurate, and members would get a better picture of how they are tracking for retirement.
Any move to allow spousal rollover should be accompanied by an education program that advises couples of the opportunities this strategy provides and to avoid a situation where they leave it too late to implement effectively.
The Retirement Income Review will provide the foundation for future development of superannuation policy by providing a comprehensive fact base. A policy to allow spousal rollovers and encourage equalisation of spouse balances should be considered in this context.
First published in the Australian Financial Review on 10 September 2020.