Q. My wife and I have used Superannuation as our primary savings vehicle for Retirement.  The proposed changes to Superannuation mean apart from Employer contributions we cannot put anymore into Super.  Should I consider Insurance Bonds?

A. Superannuation remains a very tax effective way to save for retirement. The maximum tax payable on earnings within superannuation is 15% when in accumulation mode and 0% when transferred to an Account based pension.  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 before a contribution is made.

There are limits to how much can be contributed into Super.  Contributions from an employer (including salary sacrifice) or where a personal tax deduction is claimed cannot exceed $30,000 in a financial year if aged under 50 and $35,000 if aged 50 and over.

Personal after-tax (Non-Concessional) contributions are limited to $180,000 in a financial year. Where an investor is under age 65, they may combine the limits for three years to contribute up to $540,000.

The Government has proposed to replace the Non-Concessional Contribution Cap with a lifetime cap of $500,000.  If legislation is passed, the proposed change is effective from Budget night (3 May 2016) and captures all Non-Concessional contributions made into Superannuation since 1 July 2007.  Contributions received in excess of $500,000 will need to be removed from the fund or be subject to penalty tax unless the contributions were made before 3 May 2016.

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 suffer permanent incapacity. Preservation age is 55 for an investor born before 1 July 1960 but increases up to age 60 for those born after this date.

An alternative or supplement to Superannuation is investing in Insurance Bonds or Investment Bonds. Like superannuation, tax is paid within the Insurance Bond rather than personally by the investor.

Insurance Bonds are attractive investment option for investors with income above $80,000 (whose Marginal tax rate is 32.5% or higher) or investors looking for simplicity. The maximum tax paid on the earnings and capital gains within an Insurance bond is 30%.

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 Proceed can generally be withdrawn within 5 working days.

Earnings within Insurance Bonds are automatically reinvested and tax is paid within the bond. Investors can switch between investment options within a bond without triggering Capital Gains tax.

If an Insurance Bond is redeemed after 10 years, 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 fund.

There is no limit on how much can be invested in a bond. Subsequent 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 Insurance Bond can be directed to a nominated beneficiary or to your estate.  Proceeds are tax free to all beneficiaries.

Like Superannuation, Insurance Bonds provide a range of investment options to tailor a portfolio to your needs.