New restrictions on how much you can invest in superannuation on a concessional basis (the taxed component from your employer or salary sacrifice), as well as the fact that money in superannuation is locked up until retirement, are extra incentives for investors to look for other potential tax-effective savings options.
Whilst superannuation does have a superior lower-taxed environment, there are trade-off rules governing exactly when and how much can be invested, as well as access restrictions until retirement after the preservation age of 55 – 60 years.
Insurance Bonds have regained support in recent times due to the tax-effective solutions they can deliver across a broad range of financial planning strategies, which include complementing an existing superannuation strategy.
Investment earnings in Insurance Bonds are taxed at a maximum rate of 30%. However, depending on the underlying investment option chosen by an investor they may be even more tax-effective due to various tax benefits for the issuing life office (including imputation credits – which is the tax paid by the company to the ATO before you have to pay tax) the end result can be an effective tax rate as low as 20% for investors.
While this is higher than the earning tax rate of 15% inside super – your money in an Insurance Bond is generally accessible at any time.
For some higher taxed investors an Insurance Bond can be an attractive, accessible alternative to non-compulsory superannuation contributions. For others, they might be used to supplement superannuation in retirement, or as a vehicle for funding life-event objectives which will occur pre-retirement.
Insurance Bonds do not have superannuation’s restrictions such as:
- contribution caps limits (Insurance Bonds do not have aged based/work-test contribution restrictions)
- restrictions that generally apply to using superannuation as loan security for gearing strategies (such restrictions do not apply to Bonds).
Money coming out of the superannuation system via annuities and pensions often cannot be re-contributed back into super. This ‘exited’ money can accumulate in bank accounts and may cause annual income tax problems or perhaps have an unfavourable impact on qualification thresholds say for a Commonwealth Seniors Health Card. Insurance Bonds can be an attractive alternatvie investment vehicle for such superannuation income streams.
As well as the competitive tax treatment of these investment structures, the ‘new breed’ Insurance Bonds which are now available in the market allow investors to access a broad range of underlying investment options, including some of Australia’s best wholesale managed funds. They operate like a master fund under a tax-paid investment environment, which substantially enhance the performance capabilities of Insurance Bonds. A valuable feature of an Insurance Bond is that you can modify your investment strategy without triggering a personal tax or Capital Gains Tax liability.
Australia’s ‘simplified’ superannuation system has indeed opened up opportunities to use Insurance Bonds as an accessible and flexible alternative and/ or complementary strategy to existing superannuation strategies.
If you need assistance in exploring these further talk to a professional but most importantly start your journey to being free around your money and creating wealth with understanding.
Scott Malcolm (scott@money-mechanics.com.au) is Director of Money Mechanics (ph: 6257 5557) a fee for service advice firm who are authorised to provide financial advice through PATRON Financial Advice AFSL 307379.
The information provided on this article is of a general nature only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information you should consider its appropriateness having regard to your own objectives, financial situation and needs.