Legislation introduced in the 2016 Federal Budget is about to come into effect, which the government says will predominantly place a greater tax burden on people with high incomes, while a large proportion of working Australians – particularly low-income earners – are likely to benefit overall.
The biggest changes include the introduction of a $1.6 million transfer balance cap on your super account and the reform of concessional and non-concessional annual contributions.
Centuria’s General Manager of its Investment Bonds Division Neil Rogan told Canstar that even if you won’t be affected by the changes now, it makes sense to be aware of how they could impact you in the future.
“While super remains one of the most tax-effective means of long-term saving for many Australians, the scope of the current changes means that it may make sense to review other options for investing outside of super,” said Mr Rogan.
“Investment bonds may be worth looking into as they provide investors with a simple and tax-effective structure to build wealth.
“They can also be utilised to grow, protect, and transfer wealth.”
What should you be asking yourself, and your financial advisor?
The below checklist is from Mr Rogan at Centuria, and provides investors with the most important considerations when preparing for the 1 July super changes.
1. Do you have more than $1.6 million in your pensions account? If so, what will you do with the excess?
From 1 July, you can no longer have more than $1.6 million in the tax-free pension phase of super. If you currently have more than $1.6 million, you will be required to transfer the excess either back into the accumulation phase or out of super entirely.
In the accumulation phase, returns will be taxed at 15%. If you are considering transferring out of the super system, one option worth considering is an investment bond.
An investment bond operates like a tax-paid managed fund, with a range of investment options available. Income earned is reinvested into the bond, not distributed to you. If you hold the bond for 10 years, all proceeds, capital, and investment returns are distributed to you tax free.
There is no limit on the amount you can invest, and you can make additional contributions each year if you wish, up to 125% of the previous year’s contribution.
You can access your money at any time, prior to the 10-year tax-free threshold, but depending on the timing you may forgo some of the tax benefits.
— Neil Rogan (@NeilRogan1) June 30, 2017
2. Will the new concessional contribution limit affect you?
Concessional contributions are being cut from $30,000 – $35,000 per annum to $25,000 per annum for everyone.
If you have been contributing more than $25,000 in concessional contributions to your super, you will no longer be able to do so. As an alternative, you may want to look at a savings plan outside of super for the excess contributions you can no longer contribute.
An investment bond may be a good way of saving as you can contribute regularly, returns are tax paid within the bond structure and reinvested, and fully tax free after 10 years. You can also access your savings at any time if you need to.
3. Will the new non-concessional limit affect you?
From 1 July, you will only be able to make up to $100,000 per annum in non-concessional contributions, down from $180,000 per annum.
There will be a maximum bring-forward cap of $300,000, and if you already have $1.6 million in super you will not be able to make any more non-concessional contributions at all.
If you cannot contribute as much as you would like to your super, investing outside of super in a tax-effective structure, like an investment bond, maybe an option.
There are no limits to your initial investment, and you can make additional contributions each year. After 10 years, there is no personal tax on withdrawals.
4. Do you need to have an estate planning conversation with your advisor?
Estate planning is an essential part of any financial plan; the consequences of making the wrong decisions can be very serious.
Quite apart from potentially paying more tax than you need to, bequests that come through an estate can be delayed if there are complications, and the legal fees associated with managing the estate can also be high.
An investment bond may be an option in this regard. It is simple and offers greater control over death benefits than other investment options. This is because an investment bond does not form part of your estate – and death benefits associated with the bond can be directed to a nominated beneficiary.
In addition, proceeds are paid to the beneficiary entirely tax free, regardless of how long the bond has been held.
An investment bond may also offer protection from creditors in the case of bankruptcy.
5. What should you do next?
Taking the time to review your financial situation is always a good idea, but it’s particularly important now, especially if the changes to super disrupt your long-term retirement planning strategy significantly.
It’s hard to imagine that there won’t be more changes to super in the future, or that any future changes will make the system more, rather than less, generous.
The bottom line is that it makes sense to look at other strategies outside of super, and investment bonds are a great place to start. They provide simplicity, transparency, and tax effectiveness, and can also be used very effectively for estate planning purposes.
— 7 News Adelaide (@7NewsAdelaide) March 10, 2017
Any views or opinions expressed do not necessarily state or reflect those of Canstar.