Don’t panic: tax effective retirement income still an option

Matt Walsh

Matt Walsh

While the changes to superannuation in last week’s Federal Budget caught many by surprise, there are well-established options to help people achieve a tax effective retirement income, says Matt Walsh, head of Lifeplan.

“The government-mandated superannuation system means that many people had stopped considering alternatives other than super for saving for their retirement. The changes in the Federal Budget will reverse this situation for many.

“Aside from those few people who had already reached their superannuation caps, most people simply had no need to look at alternative strategies – super was everything.

“Last week’s changes mean that more people will now need to explore options outside of superannuation, and sooner than they thought, but this shouldn’t be a cause for panic and confusion.

“A well-trodden path for higher net worth and higher income investors in the past who had capped out their superannuation limits is investment bonds, but these aren’t the exclusive domain of the very wealthy – they are easily accessible to everyone,” he said.

Mr Walsh said that investment bonds are a particularly good tax-advantaged alternative to superannuation, with earnings tax paid at a maximum of 30 per cent.

Other advantages include:

  • they do not carry the restriction on withdrawals prior to preservation age
  • they don’t have contribution limits
  • as earnings are tax paid at a maximum of 30 per cent, investors do not have a tax liability while the funds remain invested inside the investment bond
  • several providers offer a wide range of investment choice and very contemporary features
  • when held for the long term – 10 years or more – withdrawals from the investment bond carry nil personal tax liability, and taxable withdrawals prior to the 10th year receive a 30 per cent tax rebate as earnings are tax paid by the investment bond issuer
  • once the investment bond policy has reached its 10 year anniversary, withdrawals are non-assessable for income tax purposes – there is no preservation age or condition of release

Mr Walsh said that in many ways, investment bonds can be thought of as just like super, with tax rates somewhere between super and high marginal tax rates, but without all the complexity and constraints around super.

“Investment bonds are a particularly attractive option for those who aim to retire prior to reaching preservation age, or who aim to decrease their working hours while keeping a steady income flow available. In effect, it creates a true Transition to Retirement strategy outside of superannuation.
“In this situation an investment bond can be drawn on with a “deductible amount” plus a tax offset in accordance with the individual’s marginal tax rate.

“This means if an investor chose to work 20 hours less a week, they could substitute the lost income by drawing on an investment bond. Such withdrawals can be as large or small as the investor requires, and the withdrawal comprises of both a capital and earnings component. The capital component is not subject to tax.

“For this reason many investors who had reached the previous super caps have already been using investment bonds as a means to transition into retirement without increasing their tax burden.  Where the bond is held in excess of 10 years, any withdrawal amount will not be subject to further personal tax, a strategy that may allow an investor to retire early and maintain an income without affecting their taxation liability.

“Financial advisers are likely to receive many questions from clients worried about how to best save for their retirement if they aren’t able to put enough into superannuation, and investment bonds are a useful approach to discuss with them,” Mr Walsh said.

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