Is super or something else the answer to retirement saving?
I HAVE been asked if superannuation is still an effective means of saving for retirement.
Individuals who have in excess of $1,600,000 in super are ineligible to make further non-concession contributions to super. However, employer or personal deductible contributions can still be made to a person's super fund, but only up to the concessional contribution cap of $25,000 per financial year.
Super 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 super is 15 per cent when in accumulation mode and zero per cent when transferred to an account-based pension in retirement. However, there are limits and constraints with super that you need to consider.
To contribute to super 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 super 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. The preservation age is 57 for an investor born before July 1, 1962 but increases progressively up to age 60 for those born after July 1, 1964.
Super remains a tax effective method of funding retirement.
If you are ineligible to make future personal super 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.
What about investment bonds as an alternative?
I'm not sure I would consider investment bonds as an alternative to super, but rather as a supplement for those who are limited in making super contributions. Investment bonds are also referred to as insurance bonds, so the term can be confusing.
Like super, 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 per cent. 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 per cent or higher.
Unlike super, there are no restrictions on accessing the proceeds of an investment bond. Proceeds can generally be withdrawn within five 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 eight years, 100 per cent of the growth in the bond is taxable.
In year nine 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 per cent 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 per cent 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.
Super 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 per cent, insurance bonds or investment bonds are well worth considering.
Q&A with The Coach first appeared on www.wealthpartners.net.au. Any general advice in this story doesn't take account of personal objectives, financial situation and needs.