Saving for retirement outside of super

For many Australians, superannuation remains the most tax-effective long-term savings strategy. However, recent proposed changes have prompted investors to turn their attention to alternative, non-super options.

Giving advice on planning and saving for retirement used to be simple. Start as early as possible, contribute as much as possible to superannuation, then sit back and enjoy a tax-free income stream in retirement.

Things aren’t quite so simple now. Concerns that tax concessions in super were disproportionately benefitting wealthier Australians, and adversely affecting the tax office’s revenue, have led to successive governments making a series of changes to the super system.

The current treasurer has stated categorically that the purpose of superannuation is to provide for a reasonable retirement, and that it should not be used as an inter-generational wealth transfer tool or for the purposes of wealth creation or estate planning.

In line with this thinking, the most recent changes to superannuation proposed by the government are significant. If passed, they will impose a lifetime cap of $500,000 on non-concessional contributions, a cut in the annual concessional contributions cap and a $1.6 million limit on the transfer balance for a super pension. And there are no guarantees that future budgets will not make further changes.

Where could this leave the many Australians who have reached the proposed non-concessional cap or are high-income earners with surplus after-tax income after salary sacrificing into superannuation and reaching their concessional contribution caps? And what about those who simply want a tax-effective structure which offers flexibility, certainty and simplicity?


Two of the most common options are to invest via a private company structure or to invest in an investment bond. Investors should seek advice as to the best structure for them, but many of the unique features of investment bonds mean that in many circumstances they can have advantages over a company structure.

Investment bonds and company structures – what’s the difference?

Setting up a private company is one way of holding investments. Company earnings (from investments the company makes or from any other source) are taxed at the company rate of 30 per cent rather than the individual investor’s marginal tax rate, which could be up to 49 per cent (with the current budget repair levy).

While funds remain within the company structure and are not distributed, they will not attract more than 30 per cent tax. However, as soon as income is distributed, the recipient will be required to pay the difference between his/her marginal tax rate and the company tax rate of 30 per cent (after allowing for any franking credits and capital gains tax discounts). A company structure is, therefore, only a tax-deferral mechanism.

An investment bond is technically a life insurance policy, with a life insured and a nominated beneficiary. They operate like managed funds in that investors choose from a range of investment portfolios, depending on their investment goals and horizon.

An investment bond is a ‘tax paid’ investment. This means that investment returns are taxed within the bond structure at the company rate of 30 per cent. Distributions are re-invested in the bond and investors do not need to declare returns from the bond in their tax return.

Funds invested in an investment bond are accessible at any time. However, if the bond is held for 10 years, the proceeds are 100 per cent tax free and will not need to be included in personal income tax returns. There is no limit on the initial amount invested in the bond and investors can contribute an additional 125 per cent of the previous year’s contribution every year.

If the investor chooses to withdraw the funds from the bond before 10 years, he/she will get a rebate for the tax already paid within the bond, and will then pay the difference between his/her marginal tax rate and the company rate of 30 per cent. Depending on the underlying investment portfolio, franking credits may also apply, further reducing the overall tax rate for the investor.

Investment bonds are cost effective

Investment bonds are simpler, easier and more cost effective to set up than a company structure, and the same is true of the ongoing costs. 

Regulatory requirements associated with a company structure mean that tax returns must be prepared every year. The company must have a registered office and a principal place of business, disclose the personal details of directors, pay fees to ASIC, and keep detailed financial and other records. Complying with these obligations can be costly and often requires help from a chartered accountant who must also be paid.

Investment bonds, on the other hand, are far simpler and less costly to run. Once the investment bond is set up – an inexpensive process – ongoing fees are paid to the manager of the bond. Depending on the portfolio and the manager, these fees are typically between 0.9 per cent and 2.0 per cent and are paid from within the bond structure.

And there’s an added layer to the costs associated with a company structure. If the company invests in managed funds or other investment alternatives, the investor will pay twice – the costs associated with setting up and running the company in the first place, and the costs and fees associated with the investment he/she makes through the company.

Investment bonds make estate planning easy

Because investment bonds are technically life insurance policies, there is always a beneficiary nominated and should the investor die, the proceeds of the investment bond will pass directly to the beneficiary, tax free, and will not form part of the estate. This is the case even if the bond has not been held for 10 years and regardless of the relationship of the investor to the beneficiary.

This makes the investment bond a good option for older Australians looking to direct money to their children and grandchildren in a way that keeps the money from becoming part of their estate. In addition, because they are insurance policies and do not form part of an investor’s estate, they also provide bankruptcy protection and will not be counted as an asset in a bankruptcy proceeding.

Investment bonds can also be used effectively in the aged-care space because they can reduce assessable income and therefore reduce care fees. For investors on higher incomes, and therefore likely to pay a high income-tested fee, investing in an investment bond can reduce assessable income because returns from the bond are not distributed to the investor.

Investment bonds encourage a regular savings plan

Whether you are putting money aside for a child’s education, working towards a major event or simply saving, an investment bond allows for and encourages regular contributions up to 125 per cent of the previous year’s contribution. And because no tax is paid after 10 years, there is a real incentive to keep contributing.

Once the 10-year period has been reached, the funds in the bond can be distributed in their entirety, or as a regular income stream, entirely free.


For investors seeking simplicity, certainty and flexibility within a tax-effective structure, investment bonds can offer advantages that are difficult to match. They are inexpensive to set up, simple to manage and cost effective to run. They can be used to direct money to family members as beneficiaries and have the potential to reduce aged care fees and provide bankruptcy protection. Investors who are looking for alternative strategies to super would be well advised to consider investment bonds.

Neil Rogan is general manager, investment bond division at Centuria Capital

Saving for retirement outside of super
Neil Rogan
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