Attention focuses on Budget

Press, 25 July 1989, Page 29

Attention focuses on Budget

By

ROGER A. LEWIS,

director, Trident Securities

With the July Budget due out in two days, attention is focusing on announcements likely to be made concerning the future tax regime under which superannuation planning will operate. Will the Budget clarify one of the five alternatives which have been given by the Government?

Will it cover in more detail the suggestion of a compulsory scheme’ with its attendant implications? Will it continue to support the “tax, tax, exempt” philosophy which has been promoted by this Government? Will it address the matter of national superannuation and the anticipated scaling down of benefits that undoubtedly will occur in years to come?

These are just a few of many questions which again focus interest on the forthcoming Budget announcements. Even if these issues are clarified, it may well be that a number of them will not

be implemented in legislative form until after the next election.

Many people have put off making decisions on retirement planning because of impending announcements. Others in the ensuing months will defer their decisions yet again until they see what legislative changes may occur in the future.

The problem is, of course, that there is no guarantee that this endless change of adjustment and reversal can ever be stabilised or stopped. The cyclical nature of the political process, changing party positions on taxation reform, diffferent philosophical approaches to national superannuation with respect to its social welfare implications, and the interpretation of statistical data with regard to demographic changes in the future, all illustrate only too clearly how impossible it is to provide a stable legislative platform on which to base long term superannuation in-

vestment decisions.

We recently attended a conference where in 24 hours two view points on the future direction of superannuation were given by both Government and Opposition M.P.s. These speeches presented radically differing view points which underscored the reasons why a bipartison approach has not been successfully achieved in future planning for superannuation.

The very difference of these view points does not augur well for creating certainty for the ordinary person to plan their superannuation programme with confidence.

Considerable discussion has come from insurance quarters with regard to tax incentives. Many feel it is important that tax incentives be reintroduced in order to en-

courage long term savings into superannuation. Our own view point is that tax incentives on contributions create other anomalous distortions.

First, they clearly disadvantage other investment mediums that may rightly and properly be chosen for long-term retirement planning. They immediately create a channelling of investment flow into superannuation funds at the expense of other suitable investment areas. In addition, the tax incentives that have prevailed in the past have been used in particular by insurance companies to mask the real performance of their products, which, inhibited by high setup costs have in fact performed very poorly from an investment return view point.

Tax incentives on contributions have also

created a needless and unwise mental barrier whereby many people planning for retirement have limited their saving to only that amount which enjoyed tax deduction, irrespective of the percentage of their salary that really should have been saved to ensure adequate retirement funds.

Our personal belief is that if incentives need to be offered at all they should be offered on the basis of an increased or enhanced return on invested funds, where those funds are locked in. What all of this does demonstrate, however, is that it is vital for people to plan their retirement programmes on a basis which is entirely unaffected by tax, one way or the other.

We have in the last 10 years or more come through a whole raft of changes in the superannuation arena. It is likely that these will continue in the future. It is

likely that a stable basis of tax treatment for superannuation will not be developed which will last for decades to come.

It is essential, therefore, that people plan for retirement, irrespective and regardless of any tax implications there may be.

We believe that the important thing is for people to realise the magnitude of the problem that they face personally for retirement provisions. They need to select investment products that are inherently stable, and in particular to avoid those products with high up-front charges that effectively destroy or seriously inhibit investment performance for the first five to-10 years.

Until some form of incentive for locked-in funds occurs, they should select funding vehicles which allow, continued access to capital in the event of need to place these funds elsewhere.

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