While the changes to superannuation in last week’s Federal Budget caught many by surprise, there are well-established options to help people achieve a tax effective retirement income, says Matt Walsh, head of Lifeplan.
“The government-mandated superannuation system means that many people had stopped considering alternatives other than super for saving for their retirement. The changes in the Federal Budget will reverse this situation for many.
“Aside from those few people who had already reached their superannuation caps, most people simply had no need to look at alternative strategies – super was everything.
“Last week’s changes mean that more people will now need to explore options outside of superannuation, and sooner than they thought, but this shouldn’t be a cause for panic and confusion.
“A well-trodden path for higher net worth and higher income investors in the past who had capped out their superannuation limits is investment bonds, but these aren’t the exclusive domain of the very wealthy – they are easily accessible to everyone,” he said.
Mr Walsh said that investment bonds are a particularly good tax-advantaged alternative to superannuation, with earnings tax paid at a maximum of 30 per cent.
Other advantages include:
Mr Walsh said that in many ways, investment bonds can be thought of as just like super, with 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.
“In this situation an investment bond can be drawn on with a “deductible amount” plus a tax offset in accordance with the individual’s marginal tax rate.
“This means if an investor chose to work 20 hours less a week, they could substitute the lost income by drawing on an investment bond. Such withdrawals can be as large or small as the investor requires, and the withdrawal comprises of 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. Where the bond is held in excess of 10 years, any withdrawal amount will not be subject to further personal tax, a strategy that may allow an investor to retire early and maintain an income without affecting their taxation liability.
“This makes it a very attractive option for investors seeking a tax-effective way to save for their retirement outside of the superannuation regime,” said Mr Walsh.
Lifeplan Funds Management is a specialist business of Australian Unity Investments. It is a market leader in investment and funeral bonds, and a leading provider of education investment funds.
For further information, please contact:
Head of Lifeplan
Phone: 08 8236 4706 Mob: 0418 113 878