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Connexus : Issue 38
connexus www.abacus.org.au 47 47 connexus www.abacus.org.au FEATURE INSURANCE Australia’s concentration on superannuation is leaving it lagging behind other developed nations in encouraging its population to save for crucial life events other than retirement, according to a new report commissioned by Abacus. The report, Private Saving: The role of life event products, concludes that the Australian government’s focus on providing tax incentives to promote additional saving for retirement via superannuation may have “impeded the development and growth of other financial products”. It says products such as insurance and friendly society bonds are “well suited” to assisting people to save for a range of other life events in areas including education, housing, health, aged care accommodation and funerals. “On the basis of international evidence, it appears that Australian policy-makers have failed to appreciate the opportunity that life event savings schemes offer, such as for education and medical savings in the United States,” say the report’s authors, professors Kevin Davis and Deborah Ralston, of the Australian Centre for Financial Studies. “As a consequence, such products receive far less favourable tax treatment in Australia.” Davis says the current tax framework for insurance bonds leaves little incentive for low income earners in particular to use them to save for dedicated life events, despite their significant benefits. Among the benefits the report highlights are their usefulness in making targeted intergenerational transfers of wealth that don’t get entangled in inheritance or personal bankruptcy issues. It also draws attention to the gains in financial literacy that can result when people are encouraged to save for short to medium-term life events via a simple product that doesn’t require them to seek complex or expensive financial advice. Daniel Newlan, an Abacus senior advisor in public and policy affairs, says such products could be used long- term to increase Australia’s overall level of savings. “This is about creating an embedded savings culture in Australia. To do that, policy should be focused on encouraging short to medium-term savings first, rather than just promoting retirement savings, which it has traditionally done.” The report concludes that Australia would need to reduce the tax and legislative bias towards superannuation to encourage such a savings culture. Of its three recommended changes, the most crucial would be reducing the tax rate applied to earnings from insurance bond funds from 30 to 20 per cent. Such a change would have a massive impact, potentially restoring insurance bonds to favour, says Austock Life managing director Ross Higgins. “People continually weigh up this form of savings against super,” he says. “The issue for a family where its main income provider often has a tax rate of around 30 per cent is that there’s not a huge incentive on pure tax grounds to use this sort of product. The disincentive is heightened when there is a working spouse also taxed at 30 per cent, and often less.” To help address this problem, Davis suggests government could also investigate making co- contributions to insurance bonds for lower income earners. Other recommendations include a reduction in the 10-year holding period required for tax-paid/tax-free payouts for specific types of targeted savings, and a review of the annual contribution cap of 125 per cent of the previous year’s total contribution to cover situations of a contribution gap or lower contribution in some years. Chris Wright, chairman of the Friendly Society Association, welcomes the report, saying a level playing field for insurance bonds in relation to superannuation is vital if the government is going to encourage the people who can afford to save to take responsibility for providing for significant life events other than retirement. Failure to do so could cause a drain on the public purse in the long term. “We’re saying there is the opportunity to encourage people who can afford to start to save for these events, and that will have an important impact on future generations.” – Christine Long is a freelance writer. Super drains savings pool Superannuation incentives are impeding the development of other important financial products, says a new report. By Christine Long “This is about creating an embedded savings culture in Australia.”