Super alternatives for retirement planning

November 8, 2016

Proposed changes to superannuation rules are designed to discourage retirees from using their super as an estate planning tool.

Instead, the legislated “objective” of superannuation will be to “provide income in retirement to substitute or supplement the age pension”.

Stricter limits on contributions, combined with a cap on how much can be transferred to a tax-free private pension and a rise in the contributions tax for high income earners, means wealthy investors may need to look for alternative ways to supplement their retirement savings.

The tax concessions offered by super remain generous, but there are alternative retirement investment structures – the main three are investment bonds, private company structures, and family trusts – and they all have unique taxation advantages.  

Personal investments

Before you would even consider investing in any these, you’d need to have investable assets, including your tax-free pension account, of more $2,137,983 – twice that for a couple.

Investing privately, in your own name, is the first alternative to consider.

Most retirees are eligible for the Seniors and Pensioners Tax Offset (SAPTO), which allows a single person to earn $32,279 a year, tax free.

Assuming a rate of return of 6%, that would allow you to invest $537,983 in your own name, outside of superannuation, without paying any tax at all.

Even once this amount is exceeded, your superannuation accumulation account offers an inherently lower tax rate than other alternatives, such as investment bonds and private company structures, with a lot more flexibility on spending the money.

Investment bonds

Investment bonds have a few things in common with superannuation and may be a tax-effective savings alternative for higher-income earners.

There is no limit on your initial investment and additional contributions can be made each year; up to 125% of your previous year’s contribution. Investments held within an investment bond are also entitled to full franking credits and earnings are automatically reinvested.

Investment bonds offer a tax rate of 30% on earnings. Investment earnings are taxed within the bond structure – in the same way super earnings are taxed within your super fund – so there is no complication with your personal tax return, as long as the bond is held for at least 10 years.

After 10 years, there is no personal tax on withdrawals. So investment bonds may provide an alternative source of income to compliment your super capital, particularly in light of the government’s proposed $1.6 million limit on super-funded pension accounts.

Finally, investment bonds offer some flexibility with estate planning. You can nominate a beneficiary to receive a tax-free lump sum if you pass away.

Private company structures

Higher-income earners may benefit from setting up a private company, as any earnings are taxed at the company rate of 30% while funds are held within the company.

However, as soon as income is distributed to an individual, that person must pay the difference between their marginal tax rate and the company tax rate of 30 per cent, minus any franking credits and capital gains tax discounts.

So a company structure is really only a tax-deferral mechanism. However if you can take payments from the company at a time when your tax rate is lower, this can save tax overall.

Setting up and maintaining a company structure can also be very costly and can often require the services of an accountant.

Family trusts

A family trust is set up to hold a family’s assets for investment purposes. Investment income or capital gains from the trust are distributed to its beneficiaries, usually the trustee and their spouse, adult children, grandchildren and their spouses, as well their company and any registered charity.

Family trusts can be extremely tax effective. While all those who receive income from the trust have to pay tax at their marginal rate, distributions don't have to be made equally. This means more can be distributed to family members on lower marginal tax rates; family members who may be studying full-time or only working part-time for example – but not children under 18 as they pay higher tax rates on investment income.

There are no limits on how much money can be put in or taken out of a family trust, nor restrictions on the types of assets that can be held; you can even put your holiday home in the trust if you like.

Finally, family trusts can continue even when you pass away, making them an excellent vehicle for intergenerational wealth transfer.

 


When you’re considering a retirement strategy, it helps make a difference to speak to a Mercer financial adviser. Call 1300 850 580 or book an appointment online.

 

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