RSM Australia

Concerned about super changes and wonder if you can still retire early?

With all the changes to superannuation and Centrelink that have taken place it’s understandable that Australians are concerned about being able to access their retirement nest egg when they want to.


Recently I read the following question in a financial publication that really intrigued me:


“I currently salary sacrifice into super along with my employer’s contributions and will continue to do so up until retirement. Retirement however is still quite a few years away and I’m a little concerned that the preservation age at which I can access my super (age 60) may increase in future, given that the eligibility for the age pension is moving to age 70. Besides gearing, is there another tax effective option that could be utilised alongside my super?”


Firstly I was reassured that despite all the changes, the person was still confident in their strategy to use super as their preferred retirement vehicle. And why not really?


Its tax benefits were designed exactly for that purpose. But what stood out was that the person was considering broader strategies to achieve their objectives and to account for any further changes to the rules. Wise for everyone really!


This got me thinking, particularly because the person was focused on investment vehicles rather than strategies like gearing, borrowing to invest, which may be considered to be more risky. There are a number of other strategies or structures, not mentioned, that could be used to assist them in achieving their objectives. Like investment companies or discretionary trusts. Despite these offering a range of benefits to Investors. They do increase the complexity of a person’s circumstances and require more management.


One option, arguably a more simplistic approach, that is often overlooked, is investment (insurance) bonds. This style of investment vehicle operates in a not-dissimilar fashion to superannuation. Its investment returns are taxed inside the bond, at a maximum rate of 30%...


So if your taxable income is above $37,000 (32% tax bracket) this vehicle may provide an improved after tax return, without a further 2% medicare levy. Plus! If you hold the bond for at least 10 years, then there is also no capital gains tax (CGT) payable if, or when, you withdraw the money.


You will however forego some things including;


  • access to the individual investors 12 month (CGT) discount, as this is not available inside the bond
  • personal access to dividend franking credits, as any received by the bond are used to offset any tax due within the bond, and
  • at call access to the capital, if you want to preserve the full tax benefit of the investment

Bonds can be used to invest lump sum amounts or, like super, you can invest into a bond on a regular basis from your after tax income. You can therefore use investment bonds as a complimentary vehicle to your regular savings programs to super and, if you get the timing right, this capital could be available to you tax free, prior to meeting the super retirement age (preservation age).


Great if your aim is to retire early, before age 60, of if the preservation age changes.


When it comes to the types of assets that can be purchased within a bond, as you would expect they offer access to all the core styles of investments including cash, property and shares (both Australian and international).


Within a financial plan tailored to your circumstances, bonds can be a very useful tool to compliment your existing investment and superannuation strategy. Investment bonds can provide flexibility to help you to achieve a range of objectives. Early retirement or risk management against further super changes is just one, but others including education funds for children or grand-children, or a sinking fund (long term savings plan) to repay an investment loan in the future.


What is most important with investment vehicles like super and certainly investment bonds, is that you structure them correctly to meet your needs.


As investment specialists we can assist you by ensuring that any retirement, or early retirement plan, is correctly structured to suit your current circumstances and to assist you to achieve your future financial objectives.


For more information in relation to structuring your finances to achieve your retirement goals, contact us and we’ll also send you our free newsletters, SME Pathways and Super Pathways, with updates and tips tailored made for people who want to be in control of their financial future.


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