The Retirement Rubicon - Budget Special

It was a long day in the Budget lock-up, working through the various volumes that collectively make up the Budget Papers.

On a narrow reading, this was not a big superannuation Budget. But retirement policy rarely sits neatly inside the superannuation section. Housing policy, tax settings, Age Pension rules and intergenerational wealth transfers all shape the outcomes members eventually experience.

Here are the key issues that retirement professionals need to be across from the 2026-27 Budget.

For the superannuation traditionalist, this Budget would appear to contain next-to-nothing of interest.

Yes, the long-telegraphed annual performance test changes have moved another step forward, with the Government to consult on options to strengthen the test, reduce unintended barriers to investment and ensure it remains fit for purpose.

That matters. The Your Future, Your Super initiative test has already seen a number of MySuper products fail twice and be closed to new members. But the methodology has also been criticised for encouraging benchmark-hugging and reducing trustee appetite to move too far from conventional asset classes.

Beyond the annual performance test, the Budget proposes to extend the payment period of the full rate of the Age Pension supplement for those travelling overseas from six weeks to twelve. This is forecast to benefit some 92,000 pensioners who are away from Australia for more than six weeks each year. Those residing overseas for more than 12 weeks in a pension year will, however, cease to receive the Pension Supplement.

That is useful administrative detail for some members. But it is hardly the stuff of a major retirement income reset. Which is why the more interesting retirement story in this Budget sits elsewhere.

The key initiatives announced in the Budget, while ostensibly directed at housing affordability, have a ‘second-order effect’ on medium-to-long-term retirement outcomes.

Here’s why.

As widely telegraphed, this Budget proposes to curb some of the tax concessions investors have enjoyed in respect of residential property since the Ralph review of business taxation in 1998-99.

The Budget proposes to limit negative gearing for residential property investments only to new builds from 1 July 2027, and to allow property-related losses to only be deductible against other income from residential properties.

As for capital gains, the Budget proposes to return to the pre-September 1999 regime of applying tax only to real, inflation-adjusted capital gains. The changes to the CGT regime will only apply prospectively from 1 July 2027.  The 50% discount will still apply to gains accrued on eligible existing investments prior to the start date, irrespective of when the gain was realised.

Over 90% of private trust wealth is held by the wealthiest 10% of households. The third key tax-related change is a proposal to apply a minimum 30% tax to discretionary trusts from 2028-29. These changes will not apply to complying superannuation funds, fixed and widely held trusts, or charitable and special disability trusts.

We have had a consistent position in the market that as goes housing security, so goes retirement security. That is because gradually acquiring a principal residence, by paying off a mortgage over two or more decades, is conceptually similar to growing a superannuation nest egg over one’s working life: they are both multi-decade savings programs.

Our central thesis, as we outlined in this 2023 piece, is that housing security is retirement security, insofar as one’s housing tenure at the point of retirement (outright owner, mortgaged owner or renter) is a strong predictor of retirement outcomes.

As a consequence, and to the extent that societal forces are now making outright ownership at retirement less likely, our view has been that Australia’s deteriorating housing affordability will increasingly impact retirement outcomes, especially for Millennials and Gen X.

But here’s the thing. While the presumption thus far is that cratering housing affordability is a ‘tomorrow problem’ impacting only younger cohorts, developments have started to take on more immediacy for today’s retirees.

Take the following letter to the AFR’s Q&A section, published this past weekend:

A few points of note.

The annual draw, presuming it is at the Schedule 7 minimum rate, would suggest that this couple are significantly funded relative to the circa $420,000 in super of the median retiring couple today.

Further, the question was answered by a financial adviser who, noting the desired sum exceeds the Home Equity Access Scheme limits, suggested an alternative strategy of a lump-sum withdrawal from this couple’s superannuation instead.

And therein lies the housing-versus-retirement dilemma in a nutshell.

A couple who is comfortably retired at present are faced with the Hobson’s choice of either seeing their daughter struggle with a million-dollar mortgage or eating into their retirement savings to help her. Australia’s cratering housing affordability has impacted not just the daughter’s financial position but potentially their retirement position too.

It is through that extended lens that we view this Budget.

If the changes to negative gearing, CGT and the taxation of discretionary trusts combine to rebalance the twin savings programs of housing acquisition and retirement readiness, that will be to the long-term good of Australia’s retirement income system.

Particularly if those changes can ameliorate the growing debt burden of retiring Australians.