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What the federal budget didn't say

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Looking at last month's budget, it was as much what was not in it as what was in it.

The glaring omissions relate to tax and super - key considerations for Money readers. For years we have told you to salt your money away into super to take advantage of the lower tax rates. For now that holds.

But in the future the ability to access that capital when you require it will not be so certain.

What the budget didn't say federal budget

The government definitively says there will be no changes to the super system - at least not until after the next election. But the next election is just 12 months away. You have been planning your super for decades. The time spans of retirees and politicians are poles apart.

What you sense coming is that the government will not want people to take lump sums from super. It will want the money commuted to a do-it-yourself pension in the form of an allocated annuity or pension.

It raises serious questions about how people might pay off their houses. It also raises questions about why people of reasonable means would voluntarily contribute more of their after-tax savings to super, especially while negative gearing survives. More on that in a moment.

Bear in mind that the change to push people's super into retirement income streams is not upon us yet. But I sense that day is coming closer and closer. In short, if you are of retirement age and you think you need cash, grab it while you can.

A big question is will the window close on negative gearing for investment property. You can blame booming Sydney house prices if you like, but the Australia Council of Social Service (ACOSS) has recommended to the government that people be allowed to make tax deductions for interest only equal to the rent earned.

Why should you take any notice of ACOSS? Because its CEO, Cassandra Goldie, and her team are the group that convinced the government it should change the rules on the pension asset test. I make no criticism of ACOSS for its proposal (to divert funds from so-called wealthier retirees to create higher pensions for those with lower assets).

But do note that the change will see couples with their own home plus other assets worth more than $823,000 (compared with $1.15 million currently) lose their pension altogether from 2017.

It also means (using a term deposit of 3% as the investment basis for the non-housing assets) a couple with $400,000 (including their pension) will earn around 75% more income than a couple with $800,000.

That said, most people with money in allocated annuities or super funds will continue to opt for growth or balanced investment options which, over time, should deliver an average return of 7% to 8% a year. This makes it easier for the person with $800,000 to cope and to dip into their assets to lift their annual living expenses.

The big problem is the volatility of markets, for this system virtually forces retirees to keep their assets in "at risk" assets, especially with interest rates so low. This raises the issue of the one-in-10-year fall in asset prices, with the accompanying stress it brings for those who no longer bring in an income.

For those not yet retired, it also brings the rather peculiar option of upgrading your house before you retire to reduce your assets so that you qualify for a reasonable chunk of the age pension.

This also presumes your house is an appreciating asset but not means-tested or likely to affect your pension. If you get into financial strife in the future (or more realistically need to pay a deposit for a nursing home) you can sell the family home and downgrade.

But all this presumes that things go according to plan and those one-in-10-year financial disasters don't land on top of you at an inopportune time (and Murphy's law, being what it is, means that is exactly when markets will fall).

I have heard economic ministers say in the past month that Australians should consider the age pension as a safety net, and not a right. They have suggested ordinary Australians will not manipulate their affairs simply so they qualify for an age pension. Seriously?

If there's one thing all of us need to do it's to understand the system and work out what works best for us. Politicians create the system. But if financial planners or individuals find ways to make the best of that system, it is absolutely their right to do so.

Just as it is the politicians' right to change the system if they think it is leaking too much money, which is exactly what they are doing in this case.

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