John Cameron's personal blog

Serious discussion about your financial position now - and in the future.

Pension Caps

Okay, at the risk of being beaten up by well-heeled senior citizens (It’s OK, I’m one myself) wielding folded budget papers, I will say it:

     “I support the Government’s action to limit the amount held in an allocated pension to $1.6million.”

There, I have said it.

Before going on, let’s have a quick look at some history.

The first thing to remember is that the Government has always placed limits on how much superannuation people could have – no doubt to limit the drain on revenue due to superannuation’s tax concessions. The limits have come in two main forms:

• How much you could contribute to superannuation.

• How much you could get out of superannuation.


This all changed in 2007.

Prior to July 2007, people receiving a superannuation lump sum, at any age, would pay lump sum tax, in much the same way as anybody receiving a lump sum today, before age 60. If you rolled over to an account based pension (or one of its predecessors), then it there was no lump sum tax, and the income was taxable at normal rates, BUT WITH A 15% REBATE. In other words, the income was taxed at a reduced rate. Any lump sum withdrawals were taxed as lump sums. With a bit of planning, it was possible for a couple to get an income of about $60,000 pa, before tax was payable. Pension funds paid no tax on their earnings. Also, prior to 2007 there was a limit on how much you could get from superannuation, known as the Reasonable benefits Limit (RBL). 

Fast forward to 2006. In the 2006-07 budget, Treasurer Peter Costello announced that all superannuation receipts from super funds that were paying tax, whether lump sum or pension, would be tax free from 1st July, 2007 for people aged over 60. The RBL was abolished. 

So, from 2007, two things were abolished:

• How much you could get out of superannuation.

• Payment of tax on superannuation for over 60’s

 In addition, people had a one off opportunity to make non-deductible contributions up to $1 million, as well as generous deductible contributions with limits based on age. For people aged over 50, the limit was $105,113pa. Then, you could make non-deductible contributions of $150,000pa, (since raised to $180,000pa). This provided the prospect of:

• Building up a substantial amount of capital

• In retirement, having this capital earning tax-free returns

• Taking a tax-free income

• Passing capital tax-free to dependants on death

• Passing capital tax-free to non-dependants by means of transfers prior to death

 Add in other benefits such as superannuation being sheltered from creditors (barring exceptional circumstances), and superannuation suddenly offered many more benefits than just retirement income, such as:

• A means of providing for retirement income (as originally intended), but also

• A wealth maximisation tool

• An intergenerational wealth transfer tool

• An Estate Planning tool

• A tax minimisation tool

• Protection from creditors

 Sure, there were a few crumbs such as Government co-contributions thrown the way of low income earners, but superannuation had strayed a long way from its original mission of providing retirement income for everybody, and reducing that other drag on the Budget, namely the old age pension.

To rub salt into the wound, the Government in 2006 – 2007 presented these changes as a way to “simplify” superannuation. We know how that has turned out.

In the years since the Costello changes, Governments have been trying to rein in the concessions, and they have mainly done this by limiting the amount that can be contributed – and I would argue that this has gone too far. The limits on contributions as they now are, seem much better suited to an industrial era economy of lifetime employment, rather than an “Innovation age” economy, of flexible workplaces, and periods out of the workforce for purposes of family or education.

Now that the Government has tackled the amount that can be held in tax free pension funds, and have provided some additional benefits for low income earners, hopefully this will start restoring superannuation to its proper purpose (but contributions need to be looked at). 

I have been involved in advising retirees for over three decades. When the 2007 changes were announced, a number of Financial Planning veterans looked at each other (literally and figuratively), and muttered “This is too good to last”. Maybe it is another example of the old saying that if something “is too good to be true, then beware”.

So far as Grandfathering goes, the Government was right not to Grandfather these changes. If they had, it would have sent a message that the tax free benefits of big super were OK for some people, but not others, as well as adding yet further complications.


Let’s look briefly at the changes to the age pension assets test. These will come into force on 1st January 2017, and reduce the pension for people with assets towards the upper end of the scale, and raise it for people towards the lower end of the scale. 

Importantly, there is no Grandfathering. Everybody receiving an age pension will be affected.

Given that there is no Grandfathering of age pension changes, how could the Government have possibly Grandfathered the superannuation pension limits?

To do so would have said that the well-heeled could keep their prize, but the less well-heeled pensioners could not. The politics of such a proposition would be toxic, and fatal to any integrity the Government has. 

Well done Scomo.


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