Supplementing super strategy
How investment bonds can boost your retirement savings
The changes to superannuation that came into effect on July 1, 2017 have made it a less-attractive option for certain investors because of particular limits and constraints. An alternative investment that may appeal to financial advisers and their clients, which also offers a tax-effective structure is a Centuria LifeGoals investment bond.
It’s no secret that Australia’s population is ageing. Most of us are likely to live far longer than past generations thanks to advancements in healthcare and a higher standard of living.
This is great news, especially when it comes to retiring as you are now more likely to have another 25 years or so of living ahead of you after you retire.
But a longer lifespan also opens up the question of whether you have sufficient retirement savings to see you through. While superannuation is one of the most tax-effective vehicles in which to save for retirement, recent changes have made it less attractive. Therefore, it’s important to consider tax-effective strategies outside of super that can be used to bolster your retirement savings.
From 1 July 2017, major changes to super came into effect. These changes include:
- Restrictions to the amounts that can be contributed each financial year into your super account: $25,000 for concessional contributions and $100,000 for non-concessional contributions;
- A $1.6 million transfer balance cap on the total amount of super an individual can transfer into pension phase; and
- The removal of the tax exemption for transition-to-retirement pensions.
The limitations of super
Super is a tax-effective way to save for retirement. While you do pay tax on super it is usually at a lower rate than the marginal tax rate you pay on your regular income. Super can be taxed at three stages:
- When you or your employer makes a before-tax contribution (15%)
- On your super earnings (15%)
- If you withdraw your super funds before you turn 60 (Once you turn 60, your pension payments are tax free).
When compared with the highest personal marginal tax rate of 47% (including the Medicare levy), super’s concessional tax rates are very attractive.
However, there are limits and constraints with super, and you may need complementary investments to supplement it as part of your overall retirement investment strategy.
Limitations around contributions
To contribute to superannuation, you must meet eligibility rules:
- If you’re under 75, you can claim a tax deduction for personal super contributions. If eligible, contribution caps will limit the amount you can contribute to your super fund.
- If you’re aged 65 but under 75, you can make super contributions if you’re at least gainfully employed on a part-time basis. This means you must have worked 40 hours within 30 consecutive days in a financial year.
- Contributions from an employer, including amounts paid under a salary sacrifice agreement, and contributions for which a personal tax deduction is claimed cannot exceed $25,000 in a financial year.
- Personal after-tax contributions - contributed from your after-tax income - cannot exceed $100,000 in a financial year. Also called non-concessional contributions, these amounts are in addition to any compulsory super contributions your employer makes or you make through a salary sacrifice arrangement.
- If you’re under 65, you may be able to combine the limits for three years of non-concessional contributions to contribute up to $300,000 in a single year. This is subject to the transfer balance cap of $1.6 million.
Super receives tax concessions, but in exchange, access to your money is restricted until a ‘condition of release’ is met. This generally means you cannot access your super until you reach ‘preservation age’ and have retired.
If you were born before 1 July 1960, your preservation age is 55; it increases incrementally to age 60 for those born after this date. In some cases, such as if you’re suffering a permanent disability, earlier access may be allowed.
Because of the restrictions and limitations around super, an alternative tax-effective structure such as Centuria LifeGoals could be considered to supplement your super while providing you with access to your savings at a time of your choosing. Unlike super, the current tax position of Centuria LifeGoals is not subject to any proposed change, other than a favourable tax-rate reduction (from its current rate of 30%) in the future.
How can Centuria LifeGoals supplement super?
Centuria LifeGoals is a tax-effective structure. Like super, tax is paid within the funds rather than personally by the investor. The maximum tax paid on the earnings and capital gains within an investment bond is 30%, although franking credits and other tax deductions can reduce this effective tax rate. This makes them an attractive investment option for high-income earners.
A key feature of a Centuria LifeGoals investment bond is that if you hold it for 10 years, regardless of how much the investment has grown, you pay no personal tax. If the investment is redeemed within the first 10 years, you will pay tax on the assessable portion of growth. However, a key advantage of using investment bonds is that your money is always available to you. There are a number of benefits of using Centuria LifeGoals to supplement your super:
Contributions are not limited
There is no limit on the amount you can invest to establish an investment bond. In addition, you can make subsequent investments up to maximum of 125% of the previous year’s contribution without restarting the 10-year period. You can choose to start a new investment bond if higher amounts are to be subsequently invested.
No access restrictions
Unlike super, Centuria LifeGoals investment bonds are not subject to preservation ages, so you can access your savings before age 55. This is ideal if you are looking to fund an early retirement.
Freedom to nominate beneficiaries
Centuria LifeGoals gives you the freedom to nominate anyone as a beneficiary in the event of your death. Beneficiaries are not limited to ‘dependants’, as is typically required for superannuation investments. Centuria LifeGoals provides a tax-effective means of investing but with much more flexibility than superannuation.
If you would like more information about supplementing your superannuation using Centuria LifeGoals, call 1300 50 50 50.
Case study – What to consider when super contributions have been maximised
Anthony is 45 years old and has invested wisely in the property market. He believes property returns have plateaued so sold his inner-city investment property, realising a healthy capital gain, which he used to pay off his mortgage and to maximise his concessional and non-concessional super contributions.
Anthony is considering tax-effective options in which to invest the surplus proceeds of $200,000. Because he earns a good income and does not need access to his funds, Anthony can adopt a long-term investment time horizon of 10-plus years.
He first considers investing in Australian shares, either directly or through a managed fund. Franking credits are important to him as they can help him reduce the tax paid, given he is on the highest marginal tax rate.
However, Anthony’s adviser suggests investing in an investment bond, such as Centuria LifeGoals, because that also allows him to benefit from franking credits from Australian shares. The investment bond pays tax at a maximum rate of 30% per annum.
Anthony can afford to invest additional amounts of $20,000 per annum into the investment bond for the first three years; he is unable to direct any surplus funds into super without exceeding his contribution cap. In three years’ time, he plans to reduce the contributions he invests to $5,000 per year.
His adviser confirms he can redeem his investment bond and pay no additional tax after 10 years.
When Anthony reaches age 55, his Centuria LifeGoals investment has grown to approximately $551,646 (tax paid). This is estimated to be $35,763 higher than the alternative of investing at his personal marginal tax rate.
Portfolio balance (after tax) over 10 years is $35,700 higher than investing at his personal marginal tax rate.
Illustrative example only based on the basic income and growth assumptions described above. This illustrative example does not purport to represent the actual returns possible in Centuria LifeGoals investments. An investment is subject to risk, the degree of which depends on the assets in which the investment option invests. Assumptions: Total returns of 8.5% p.a. (4.5% p.a. income [80% franked], 4% p.a. capital growth), 100% annual turnover of the portfolio, 50% CGT discount applies for managed fund.
When considering long-term investments to supplement your super, it’s important to ensure the investment meets your needs, your investment time-frame, has the flexibility to deal with unforeseen circumstances and where possible, is tax effective. When compared to other investments, investment bonds are an attractive way to supplement your retirement savings.
Disclaimer: Centuria LifeGoals offers a tax effective investment vehicle outside of superannuation. It has features that investors should consider if they wish to invest outside of superannuation. Suitability of an investment in a Centuria LifeGoals investment will depend on a person’s circumstances, financial objectives and needs, none of which have been taken into consideration in this case study. Prospective investors should obtain and read a copy of the Product Disclosure Statement (PDS) and consider the information in the PDS in light of their circumstances, objectives and needs before making a decision to invest. We recommend that prospective investors consult with their financial adviser. This document is not an offer to invest in Centuria LifeGoals. Investment in Centuria LifeGoals is subject to risk as detailed in the PDS. Centuria will receive fees in relation to an investment in its Investment Options. Issued by Centuria Life Limited ABN 79 087 649 054 AFSL 230867.