Q. My husband and I have been advised we cannot contribute personal contributions to Super due to the size of our fund.  Is Super still an effective means of saving for Retirement?  

A. Individuals who have in excess of $1,600,000 in Superannuation are ineligible to make further Non-concession contributions to Super. I assume you have exceeded this cap. However, employer or personal deductible contributions can still be made to your Superannuation fund, but only up to the Concessional Contribution cap of $25,000 per financial year.

Superannuation remains a very tax-effective way to save for retirement and to receive tax-advantaged income in retirement. The maximum tax payable on earnings within superannuation is 15% when in accumulation mode and 0% when transferred to an Account-based pension in retirement. However, there are limits and constraints with Superannuation that you need to consider.

To contribute to superannuation, an investor needs to meet eligibility rules. This requires the investor to be under age 65 or, if aged 65 to 75, they need to satisfy a work test of working 40 hours in a 30 day period within the financial year prior to a contribution being made.

If you are over 65 and sell a qualifying principle dwelling that you have owned for 10 years or more, you may be eligible to make a one-off contribution of $300,000 each.  This contribution would be exempt from the $1.6 million cap and other contribution rules.

Access to Superannuation money is restricted until a “condition of release” is met. This generally means that the investor will not be able to withdraw or use the money until they have reached “preservation age” and have retired or suffered permanent incapacity. Preservation age is 57 for an investor born before 1 July 1962 but increases progressively up to age 60 for those born after 1 July 1964.

Superannuation remains a tax effective method of funding retirement. If you are ineligible to make future personal Superannuation contributions then alternatives such as investing in Trusts or Investment bonds may be suitable.  What will be appropriate will depend upon your individual circumstances and should be discussed with your adviser.

Q. I have been recommended to consider Investment Bonds as an alternative to Superannuation. What are they and how do they work?

A. I am not sure I would consider Investment Bonds as an alternative to Super but rather as a supplement for those who are limited in making Superannuation contributions. Investment Bonds are also referred to as Insurance Bonds so the term can be confusing.

Like superannuation, tax is paid within the Investment Bond rather than personally by the investor. The maximum tax paid on the earnings and capital gains within an Investment bond is 30%. Earnings within Investment Bonds is automatically reinvested. Investment Bonds are attractive investment options for investors with taxable income above $90,000, whose Marginal tax rate is 32.5% or higher.

Unlike Superannuation, there are no restrictions on accessing the proceeds of an Investment bond. Proceeds can generally be withdrawn within 5 working days.

Investment Bonds provide a range of investment options to tailor a portfolio to your needs. Investors can usually switch between a range of investment options within a bond without triggering Capital Gains tax.

If an Investment Bond is redeemed after 10 years of establishment, the proceeds are generally tax-free. If the bond is withdrawn within the first 8 years, 100% of the Growth in the bond is taxable. In year 9 of the bond, two-thirds is taxable. In year 10 of the bond, one-third is taxable. Where the bond is withdrawn within 10 years, the investor receives a 30% tax offset on the taxable growth in recognition of the tax paid within the bond.

There is generally no limit on how much can be invested into Investment Bonds. Future contributions to a bond can be up to 125% of the previous year’s contribution without restarting the tax-free period.

On death, the proceeds of an Investment Bond can be directed to a nominated beneficiary or to your estate. Proceeds are tax-free to all beneficiaries.

Superannuation remains a tax effective method of funding retirement. However, for those who are restricted in making future contributions to Super or have personal marginal tax rates above 30%, Insurance Bonds or Investment Bonds are well worth considering.