The Financial Planning Association of Australia The Financial Planning Association of Australia

Tax reforms must address advice shortfall

In an address to the Tax Summit this week, FPA Chief Executive, Mr Mark Rantall, said the Government should facilitate incentives which help Australians build adequate retirement savings and reduce reliance on the Age Pension.

Mr Rantall said the FPA, representing financial planning at the Tax Forum offered two core recommendations designed to boost retirement savings:

        A range of incentives to encourage Australians to seek financial advice, including tax deductions for advice fees and fee rebates targeting low to middle income earners;

        Amending tax and superannuation laws that allow retirement income stream providers to develop more innovative products to counter longevity risk, such as deferred annuities.

He told the Forum that the current tax settings discourage Australians from seeking professional financial advice, which has a detrimental effect on their retirement savings. 

“Research on the value of advice conducted in 2008 by actuarial firm Rice Warner concluded that almost everyone would be better off in retirement if they had access to financial advice along the way,” Mr Rantall said. “Clearly, if Australians make better financial decisions before and in retirement that would take pressure off the Age Pension system and ease the future tax burden.”

However, he said only one in five Australians currently access professional financial advice with its cost proving a significant barrier for low to middle-income earners. 

The Government’s Intergenerational report published last year offers compelling evidence for the need to provide access to advice for age pensioners. The report projects that by 2050, 74% or 6.1million Australians aged over 65 will be receiving a full or part Age Pension. If only one in five are receiving financial advice, that leaves 4.4million pensioners who are not getting advice they need to support their retirement lifestyle. The FPA believes that bridging the advice gap for pensioners is key to reducing pressure on the Government and taxation system. 

Mr Rantall proposed the Government could mitigate the cost of advice and broaden access to it by adjusting the tax and superannuation systems in several ways, including:

        Allowing Australians to pay for advice with pre-tax dollars via salary sacrificing;

        Introducing tax deductibility for financial planning fees;

        Using a percentage of the current superannuation co-contribution payment to fund a ‘one-off’ superannuation advice fee;

        Directly subsidising financial advice for low to middle income earners.

Rantall also pointed out the development of better retirement income products has been hampered by the current superannuation and tax legislation which overly restricts the definition of ‘income stream and the eligibility of certain pension assets for tax relief.

“In particular, the FPA would like to see legislation amended to allow providers to develop ‘deferred annuities’ and other ‘longevity protection’ style income streams, where individuals can choose when to begin retirement income payments,” Mr Rantall said.

“As the 2010 Treasury ‘Intergenerational Report’ highlighted Australia’s population is set to age rapidly over the next few decades putting many people at risk of outliving their retirement savings. Deferred annuities would go some way to addressing that looming longevity risk.”

While the FPA acknowledged the lifting of the Superannuation Guarantee from 9% to 12% would help reduce the retirement savings gap, Mr Rantall said the Government must also use the tax system in smart ways now to reduce future burdens on taxpayers.

“The FPA proposals to increase Australians access to quality financial advice and better retirement savings products offer some cost-effective solutions to the problems posed by our aging population,” he said.