The financial system in Australia has always been based on some simple fundamental principles. An underlying ethos of the more you work, the more you earn, the more tax you should pay. As much as we may despise paying tax, we all accept this as fair.
We understand that the more you earn, the more you should contribute to running the country. The same principles apply in retirement, the idea is that the more you save, the higher your income should be in retirement.
Bill Shorten is now on track to upset the natural order of our financial system. This shock, which may have been unintended, is set to cause irreversible damage and may have dire consequences. Much like releasing rabbits into the wild, the devastation that was to occur was unknown until many years later. In this case, Bill Shorten’s rabbits are the proposed changes to the franking credit system.
As a financial adviser specialising in retirement planning, we are completely engaged with these fundamentals of our financial system. Financial advisers encourage people to save for their own retirement instead of relying on the age pension system. The more you put away, the higher your income will be in retirement. This removes pressure from the Government to collect taxes to pay out age pensions.
This is now all going to change with Bill Shortens proposed changes to the franking credit system. Moving forward, some people who haven’t worked hard and saved may now receive a higher income than those who have saved more for their own retirement. This goes against our ethos as a country to work harder to accumulate more. This sounds much like what caused the Greek Financial Crisis, it paid more to sit down and have a coffee than to work.
RSM Financial Services Australia has conducted some modelling around the impacts of these proposed franking credit changes...
CASE STUDY 1:
A retired couple who has $800,000 in savings will receive an income of approx. $41,900 a year, nearly $6,700 more than someone who has saved up $855,000.
CASE STUDY 2:
An individual who has saved $560,000 may receive an income of $27,700 per annum. This compares with someone who has $570,000 in savings who will receive only $23,500 of income per annum.
The increase in income is due to some people qualifying to receive their franking credits back as well as getting the age pension, whilst others will not qualify. Unfortunately, the unintended consequences of this change will encourage people to spend money, retire early or be lazy and not work as hard to accumulate wealth.
If the proposed changes come into force financial advisers (acting in their client’s best interest) will now be compelled to encourage people to spend money to reduce their overall assets. This will then enable people to qualify for higher income payments.
In the above example, if you have saved up $855,000, perhaps you should treat the family on a first-class holiday, why not buy that Ferrari that you always wanted as a kid, or finally upgrade the kitchen or man cave. Reducing your capital by $10,000 may increase your income by $8,000 per annum.
The other option is that people will retire earlier, this way they chew into their capital faster and become more reliant on the age pension system. This will have a similar effect as above.
When there is Government interference in the natural order there is always a response. Unfortunately, this response will leave Australia in a much worse position where people are not encouraged to work hard and save for retirement. It will also encourage people to ensure they qualify for age pension benefits. There are no winners with this one, only one big loser… the Australian people.
For more information
If you require further information on the franking credit system, please contact your local adviser.
This article was published in The West Australian’s Your Money section.