Are the super changes affecting your retirement planning?

If they’re not, maybe they should be! Investment bonds can be a tax-effective alternative to super for those Australians affected by last year’s changes.

Major changes to the superannuation rules came into effect in mid-2017, and by now, many SMSFs, as well as Australians earning higher salaries, will have either made changes or be considering their alternatives.

New limits to contributions

Concessional contributions (pre-tax contributions such as those from your employer) are now limited to $25,000 per annum, down from $35,000 – for people 49 years and older, and $30,000 – for everyone else. If you do make more than $25,000 in concessional contributions, you will pay an extra 15% tax.

It isalso no longer possible to make more than $100,000 per annum of non-concessional (after tax) contributions. This is a reduction from $180,000 per annum, although Australians under the age of 65 will still have the opportunity to bring forward two years of concessional contributions, up to $300,000 in a single financial year, again subject to other caps.

In addition, anyone with a total superannuation balance (made up of super, pensions and/or retirement savings accounts) of $1.6 million or more can no longer make any non-concessional contributions to super at all. This includes the bring-forward rule which allowed for larger non-concessional contributions in one year.

New limit on tax-free retirement account

In addition, you can only have a maximum of $1.6 million in the tax-free retirement phase pension account, whereas previously there was no limit on the amount you could hold in a tax-free pension account. Anyone with more than $1.6 million in the tax-free retirement phase will have had to either move the excess back into the accumulation phase (where it is taxed) or out of the super system altogether.

The bad news is that the limits to superannuation (both in terms of your ability to contribute and tax-effectiveness)mean that it is more important than ever to inform yourself about tax-effective investment strategies outside of super. The good news is that investment bonds could be the effective strategy you need to invest in for retirement and grow your wealth,particularly when you consider that marginal tax rates on personal income can be as high as 45% (plus a Medicare levy of 2%), and interest rates on cash deposits are at historical lows.  It makes good financial sense to look at tax-effective investment options.

Investment bonds are simple and flexible, and offer investment options across a range of different asset classes and portfolio combinations. They are tax-free in the hands of the investor if held for 10 years, but funds can also be accessed at any time if required.

Investment bonds are a tax-effective, flexible option

• Returns from investments in the underlying portfolio are paid within the bond structure at the company rate of 30%. If the underlying portfolio contains equities with franking credits, the effective tax rate paid may be less.
• There is no personal tax payable on withdrawals made from the investment bond after the bond is held for 10 years.
• Returns during the life of the bond do not need to be included in your personal tax return, because investment returns are re-invested and not distributed.
• Investment bonds do not form part of your estate and may be left to a nominated beneficiary (or beneficiaries), who will receive all proceeds tax free on the death of the life insured.
• Investment bonds may offer protection from creditors in the case of bankruptcy.
• Investment bonds are quick and easy to set up.
• There is no limit on the initial investment amount in the first year, although additional investments must not exceed 125% of the prior year’s contribution for the 10-year rule to apply.

Conclusion

Changes to the superannuation system have already affected many Australians, changing their retirement plans and limiting their ability to use super as the most tax-effective means of long term saving. Looking forward, there’s no question that super will remain in the political spotlight, and any further changes are likely to make it less, rather than more, generous. With that in mind, it is a good time to talk to your adviser about the possibility of using investment bonds to complement your superannuation, or for any number of long term financial goals.

Please note this is general information and does not consider the circumstances of any individual. It is based on an understanding of current legislation, but no warranty if given for its accuracy. Any person intending to act on this information should seek the assistance of a professional adviser.