Home affordability is now a major issue facing Australians. Having “your own place”, whether owned or rented, is vital to young people’s sense of independence and self-sufficiency, and is fundamental to the security of young families. That sense of physical security, which many of us take for granted, is central to successful working and family life.
Home ownership is also a significant contributing factor to financial security and personal fulfilment in retirement, and hence the problem of home affordability can’t be divorced from retirement incomes policy. The connection of home affordability to successful life outcomes is a key reason why we welcomed the Labor Opposition’s announcement of First Home Saver Accounts (FHSAs) during the election campaign.
Our super and our home are by far the most valuable assets most of us will ever own, and represent the biggest savings challenges, for both policy makers and individuals. Tax concessions are an appropriate policy measure to encourage these important life savings projects, and it hence it makes good sense to link the tax concessions for contributions and investment earnings on FHSAs to the existing super regime.
While AIST welcomed the Government’s original announcement, and supports the First Home Saver Account initiative, we have some real concerns about implementation under the proposal recently released by the Government. In response to the proposal, AIST has lodged a joint submission with Industry Super Network, and Industry Funds Forum.
Firstly, the proposal requires super fund trustees to establish FHSAs under a separate trust to the trustee’s main super fund. This raises the prospect of duplication of a raft of setup and ongoing regulatory costs, with great difficulty for trustees in recovering these costs while take-up of the product is low. It also means that trustees will be unable to leverage the existing scale and diversification of their super fund to create optimal portfolios for FHSA investments, and produce returns above the cash rate.
The initial proposal allowed individuals to make salary sacrifice contributions to an FHSA. This has been replaced in the proposal with a government contribution linked to the individual’s marginal tax rate, presumably to be administered in a similar manner to the co-contribution. While AIST supports the concept of Government assistance in saving, as well as tax concessions on investment earnings, we believe that the proposal misses the opportunity to direct assistance to those most in need – lower income earners. In response, AIST has proposed a flat 20 per cent Government contribution on personal contributions of up to $5000 per annum. We estimate that this alternative will provide an extra $1500-$2000 in savings over the life of the account for a person under $30,000 per annum income.
We also have concerns around the restrictions on participation. The proposal requires that individuals put up $1000 up front to establish the account, that an individual must contribute at least $1000 in at least four years, that a minimum entry age of 18 years applies, and that an overall lifetime cap of $50,000 on contributions applies. Our submission calls on the Government to remove the first three of these restrictions, and increase the lifetime cap to $100,000, to better reflect the current and projected cost of homes in our major capitals.
We believe that the FHSA concept has the potential to improve young people’s savings habits, and that, far from competing with superannuation for consumers’ savings dollars, it will encourage people to go on contributing regularly to their super after they have purchased their home. By making the product more flexible for younger people, with mobile lives and stop/start employment patterns, those who find saving most difficult will have a chance to get started. Financial services disclosure is also emerging as a focus for policy reform for the new Government. AIST supports the Government’s proposed “template” approach to disclosure for FHSAs, and we are participating in the Government’s Financial Services Working Group, investigating options to extend this approach to super and other financial products.
A major challenge for the superannuation industry is to foster consumers’ confidence in the retirement incomes system. FHSAs, as the first primary savings vehicle used by many young people, will be crucial in building this confidence. AIST does not support commissions being paid from FHSA products, as the impact on savings will erode not only savings outcomes, but also consumer confidence.
Andrew Barr is the AIST’s policy and research manager.