Australia shakes up pensions savings rules

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Australia shakes up pensions savings rules

By Virginia Marsh in Sydney, Financial Times

September 9, 2003

Australia is to reduce its much-criticised superannuation surcharge on high-income earners. Also, in an attempt to encourage pension saving among poorer Australians, the government will match contributions for low earners.

The Investment and Financial Services Association, an industry body, hailed the moves - first mooted during the 2001 election campaign but held up by political disagreement - as "the most significant breakthrough in superannuation tax in 15 years".

Helen Coonan, assistant treasurer, said that as a result of a compromise deal reached at the weekend with the Democrats, the 15 per cent surcharge on pension payments for those earning over A$90,500 (US$58,820) would fall from 15 to 12.5 per cent over three years.

In addition, Ms Coonan said those on incomes of up to A$27,500 would have their contributions matched dollar-for-dollar up to A$1,000 a year by the government, with smaller co-contributions also payable to those earning up to A$40,000.

Some 4.6m low income earners are expected to become eligible for some form of co-contribution under the plan. "[The] co-contribution would allow a low-income person, who puts A$20 a week into their superannuation, to add A$45,000 to their superannuation pay-out in just 15 years, and to add A$146,000 over 30 years," said John Cherry, the Democrat senator who negotiated the deal.

"With the average worker's superannuation balance only $56,000 at present, the co-contribution has the potential to significantly boost the retirement savings of low-income Australians."

The Democrats pushed for the full co-contribution to be available to those earning up to A$27,500 rather than up to A$20,000 as the government first proposed. In return, they softened their opposition to a reduction in the high earner surcharge, although this will fall by just 2.5 percentage points rather than the 4.5 percentage points initially planned.

Australia has mandatory superannuation with employers obliged to set aside the equivalent of 9 per cent of an employee's salary into a pension fund. However, most Australians still need to make voluntary top-up payments to fund their retirement adequately.