Investment bonds a tax effective superannuation alternative

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With superannuation reforms announced in the Federal Government’s 2016-17 Budget being realised, it is imperative that people  consider ways to achieve a tax effective retirement income outside the superannuation system, says Matt Walsh, general manager of Life and Super at Australian Unity.

The superannuation reform package of bills has now been passed by the House of Representatives, and two out of the three bills passed by the Senate have received royal assent. 

“The bills make a number of  significant changes to the taxation and regulation of superannuation, and will result in many more people reaching caps on their super contributions than ever before—the caps are not very high,” says Mr Walsh. 

“The reforms reduce the concessional contribution cap and introduce a new non-concessional contributions cap.

“While superannuation remains an attractive way to plan for retirement, these new caps mean more people will now need to explore options outside of superannuation, and sooner than they thought.

“But there are well-established and successful options available to those people who are concerned about reaching these caps and who are looking for a tax effective way to save more for their retirement years.

 “For example, investment bonds have been used for many years by higher income investors who have capped out their superannuation limits, but they aren’t just for the very wealthy. 

“They also offer a number of advantages for investors seeking a tax-effective way to save for their retirement outside of the superannuation regime,” said Mr Walsh.

Some of the advantages of investment bonds include:

  • Earnings tax is paid at a maximum of 30 per cent and there is no tax liability while funds remain invested within the investment bond
  • There are no restrictions on withdrawals prior to preservation age
  • They don’t have contribution limits
  • There is a wide range of investment choices within the bond
  • Withdrawals carry no personal tax liability when held for 10 years or more, and taxable withdrawals before 10 years receive a 30 percent tax rebate as earnings are tax paid by the investment bond issuer
  • Leave funds to a beneficiary which will bypass probate and avoid delays and challenges
  • Invest for children without tax implications
  • Just like super, they offer a range of investment options which are managed by professional investment managers.

Mr Walsh said that a good way for investors to think about investment bonds is as a structure that has tax rates somewhere between super and high marginal tax rates but without all the complexity and constraints around super. 

“Investment bonds are a particularly attractive option for those who aim to retire prior to reaching preservation age, or who aim to decrease their working hours while keeping a steady income flow available. In effect, it creates a true transition to retirement strategy outside of superannuation. 

“They can be drawn on with a “deductible amount” plus a tax offset in accordance with the individual’s marginal tax rate. Such withdrawals can be as large or small as required, and the withdrawal comprises  both a capital and earnings component. The capital component is not subject to tax.

“For this reason many investors who had reached the previous super caps have already been using investment bonds as a means to transition into retirement without increasing their tax burden,” Mr Walsh said.

Australian Unity Investments is a market leader in investment bonds and funeral bonds, and a leading provider of education investment funds.


For more information please contact:

Matt Walsh
Phone: 08 8236 4706