Using super for a comfortable retirement
A host of legislative changes are set to overhaul the superannuation system but investors shouldn’t despair. There’s a range of tax efficient non-super opportunities that are an attractive alternative.
Australia’s $2 trillion-plus super industry is the envy of the world but many people approaching or saving for retirement are now being forced to consider different ways to grow their nest egg.
From July 1, the government will wind back a host of generous tax concessions. Those changes include an approximate 16 per cent cut to annual concessional contribution caps (including employer contributions) and a hefty 44 per cent cut to annual non-concessional contribution caps (including non-tax deductible personal contributions).
The days of drawing an unlimited tax-free pension income in retirement are also set to end for some retirees with the introduction of a $1.6 million balance cap.
Savings above that threshold will be liable for tax from July 1 for the first time in a decade.
While super should remain a core component of Australians’ retirement plans, a number of people will clearly need to look further afield to build the type of retirement they want. Fortunately, there are a number of non-super options that can also generate attractive income and investment returns.
Lifetime ordinary annuities: powering tax-effective retirement savings beyond $1.6 million
Retirees who hold more than $1.6 million in existing pension or annuity assets have two choices from July 1: they can withdraw those funds from super (where returns are taxed at an investor’s marginal rate) or move them back into the accumulation phase of their fund (where earnings are taxed at 15 per cent).
However, if a retiree still wants to generate tax-efficient income from assets above the threshold, then lifetime annuities invested using personal savings can play an important new role. Lifetime annuities provide retirees with regular payments regardless of how long they live or how markets perform. The level of ’deductible amount’ (the capital component) which reduces the assessable income payments depends on several factors.
Let’s take a hypothetical male, John, who retires at age 65. He purchases a lifetime income annuity for $100,000 that generates annual income of $5,402. In this case, the deductible amount of income is equal to the purchase price ($100,000) divided by John’s remaining life expectancy of 19.22 years.
The deductible amount of annuities can also be impacted by commutations (lump sum withdrawals) and the residual capital value (the amount received back at the end of an investment, such as a term annuity). In John’s case, both of these figures were equal to zero.
John’s tax deductible amount is $5,202, which is very close to the $5,402 annual income that the annuity produces. In practical terms, the bulk of the income produced by his lifetime annuity (barring $200) is tax-free. While the value of the lifetime annuity does form part of the asset test for social security, it reduces over time, falling to zero when John reaches his life expectancy of 84.
Many retirees welcome the income certainty offered by lifetime annuities but remain concerned about a trade-off in flexibility. However, a multi-layered retirement solution that employs a number of strategies can effectively balance such competing interests.
New product features, such as the Death Benefit Guarantee attached to the CommInsure Lifestream Guaranteed Lifetime Income annuity, also enable investors to leave an inheritance if they die earlier than expected. This reduces another potential uncertainty that is a concern for many retirees.
Investment bonds: a tax-efficient option when super savings max out
Investors become acutely aware of risk around the time of retirement. Investment market volatility and the potential impact of a prolonged downturn, as well as the chance of outliving retirement savings, are genuine concerns.
The recent suite of super changes also highlights regulatory risk. The changes don’t just affect future plans – the $1.6 million cap also applies retrospectively to anyone who has saved above that threshold.
Investment bonds potentially offer a tax-effective structure outside of super that can also help diversify this type of regulatory risk.
It can be a particularly tax-effective option for higher-income investors who may have reached the new $1.6 million super threshold or who want to invest more than the new $25,000 concessional contribution cap and the $100,000 non-concessional contribution cap.
This can easily happen as older Australians build their retirement portfolio by funnelling assets (such as an inheritance or sale of a small business) into their super.
An investment bond is taxed at just 30 per cent and, if an investor contributes up to 125 per cent of their initial investment annually over the 10-year period, they receive further tax concessions. These can include no personal income tax on withdrawal, as well as no penalty tax rates for children and tax-free death payment to nominated beneficiaries.
Investment bonds are also flexible. As with CommInsure’s lifetime annuities, CommInsure’s Investment Growth Bond has a death benefit guarantee that can provide certainty around the minimum amount that will be paid on the death of the last surviving life insured. While holding the bond over the full 10 years offers the maximum tax benefit, investors who withdraw early may also receive a tax offset for the tax already paid within the bond.
These benefits are a key reason why Investment Growth Bonds and products such as lifetime annuities will help to boost living standards in retirement. It’s a crucial goal given Australia’s ageing population potentially faces decades in retirement. Male life expectancy from birth is now 91.5 years and female life expectancy is 93.5 years, according to the government’s Intergenerational Report .
While super will continue to form the backbone of retirement lifestyles alongside the age pension, with legislative change on the way, investors may be able to fund a more comfortable future by exploring these different options.
George Lytas is head of annuities at CommInsure
Things you should know: CommInsure Investment Growth Bond and Lifestream Guaranteed Income are issued by The Colonial Mutual Life Assurance Society Limited (CMLA), ABN 12 004 021 809, AFSL 235035 (CMLA), a wholly owned but non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. CommInsure is a registered business name of The Colonial Mutual Life Assurance Society Limited. A Product Disclosure Statement (PDS) for the CommInsure Investment Growth Bond and the Lifestream Guaranteed Income is available from your Financial Adviser or by calling CommInsure on 1800 624 100, and should be considered before making any decision about the Investment Growth Bond or Lifestream Guaranteed Income. As this information has been prepared without considering your objectives, financial situation or needs, you should, before acting on the information, consider its appropriateness to your circumstances. Any tax or Social Security information is based on the continuation of present laws and their interpretation that were current as at the latest Product Disclosure Statement (PDS). Taxation considerations are general and based on present taxation laws and may be subject to change. CMLA is not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on information in the case study to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.
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