Q. My wife and I have used Superannuation as our primary savings vehicle for Retirement. Due to the value of our accumulated Superannuation, apart from Employer contributions, we cannot put any more into Super. Should I consider Insurance Bonds?
A. From 1 July 2017, 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 each exceeded this cap. Note 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.
Notwithstanding this limitation, 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.
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 56 for an investor born before 1 July 1961 but increases progressively up to age 60 for those born after 1 July 1964.
An alternative or supplement to investing in Superannuation is to invest into Insurance Bonds or Investment Bonds. Like superannuation, a tax is paid within the Insurance Bond rather than personally by the investor.
Insurance Bonds are attractive investment options for investors with taxable income above $87,000 (whose Marginal tax rate is 32.5% or higher) or investors looking for simplicity. Earnings within Insurance Bonds are automatically reinvested and tax is paid within the bond. 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. Proceeds can generally be withdrawn within 5 working days.
Insurance 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 Insurance 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 Insurance 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 Insurance 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.