It is more than 30 years since the Liberal and Labor governments encouraged Australians to save large amounts in super with generous tax concessions for forgoing present-day consumption.

As Treasurer in 1991, Paul Keating was the architect of Australia's compulsory superannuation system. He said recently:

“I wanted a system where the individual retained the capital and did not give it to the government. It was an account with your name on it. The capital is yours, and does not belong to the government.”

Savers with enough money followed the rules and watched their investments grow with compounding and good returns. No government should now demand they spend it all during their retirement. That was not the deal. Defining the purpose of super as only for providing income in retirement is rewriting history.

Like it or not, hundreds of thousands of Australians use their superannuation as more of a tax-advantaged savings vehicle than a source of retirement income.

A recent survey of 3,345 members by National Seniors and Challenger noted that more respondents reported they would maintain the capital rather than spend it for retirement, as shown below.

As expected, those with over $500,000 in retirement savings have a significantly higher intention of maintaining their capital.

When asked why they are maintaining capital, 41% nominated 'for beneficiaries'. On whether retirement savings are a nest egg or income stream, the Report concludes: 'Super capital was not meant to accumulate and remain unused. In practice, however, many people only spend earnings from their super to preserve the capital or take the required minimum drawdown.'

Is that first sentence correct? When in the first two decades of SG did Paul Keating, Peter Costello, other Treasurers and Treasury advocate that all super balances must be exhausted in retirement?

An enormous number of Australians have more money than they will use to finance their retirement.

For example, current rules allow:

• $1.7 million in a pension account ($3.4 million for a couple) subject to no tax on income and withdrawals.
• No limit to the size of accumulation accounts taxed at 15%.
• Non-concessional contribution cap of $110,000 a year.
• Concessional contribution cap of $27,500 a year.

Plus, various schemes such as carry forward concessions and downsizer payments (of $600,000 a couple) do not count towards the contribution caps. 

In research from Investment Trends, 18% of people over 40 who have not yet retired expect to limit drawdowns for income to ensure most super can be left as an inheritance. One-quarter of retirees are already doing this.

Superannuation legislation has specific features designed for appropriate bequeathing. Binding Death Nominations (BDNs) ensure superannuation is distributed according to the wishes of the deceased member, not at the whim of another trustee of the fund or executor of the estate. 

Superannuation is not an asset of the estate. A trustee is not obliged to follow directions in a will even if super is mentioned in the will. The instructions in the BDN define the money flow.

The superannuation rules facilitate bequests to non-dependants. There is no restriction on withdrawing money from superannuation for anyone who has reached preservation age and satisfied a condition of release (including retiring). On death, if superannuation is given to anyone other than a spouse or a dependent child, there is a tax (on the taxable component) of 15% plus the Medicare levy (currently 2% for most people). The obvious approach is to gift it before death, if possible.

Treasurer Chalmers will define the objective of superannuation as providing income in retirement or similar, ignoring the fact that both Labor and Liberal Governments designed a system to allow people to accumulate more than they need.

Unless much stricter legislation is passed requiring all balances over a certain amount to be removed from super, many Australians do not intend to run down their super.

Labor badly misjudged the opposition to its policy on restricting franking credit refunds but would be on safer ground with most voters if superannuation were capped at a high amount, say $5 million per person. There is no knowing how much extra tax this would generate as the very wealthy has other tax minimisation techniques.

Go ahead, and clarify the objective of superannuation, but do not expect those with large balances accumulated by the completely legitimate (and government-sponsored) use of the system to change their plans. Their spending intentions extend beyond their lives and beyond their graves.

Graham Hand is Editor-At-Large for Firstlinks. This article is general information and does not consider the circumstances of any person. 

Some changes have been made to the original for our purposes.

The original article is available on Firstlinks.