While the proposals were hotly debated in 2016, with many undergoing changes, Australians now have a clearer idea of what the superannuation system will look like heading into the coming financial year, according to fund provider Australian Unity.
“The bills make a number of significant changes to the taxation and regulation of superannuation, and will result in many more people reaching caps on their super contributions than ever before [as] the caps are not very high,” Australian Unity life and super general manager Matt Walsh said.
“While superannuation remains an attractive way to plan for retirement, these new caps mean more people will now need to explore options outside of superannuation, and sooner than they thought.”
For the 2017-18 financial year, the concessional contributions cap has been reduced to $25,000 for all ages, while a new non-concessional annual cap of $100,000 has been introduced.
Mr Walsh said the reformed super system is likely to see investors looking for ways to get around the caps.
“There are well-established and successful options available to those people who are concerned about reaching these caps and who are looking for a tax-effective way to save more for their retirement years,” he said.
“For example, investment bonds have been used for many years by higher income investors who have capped out their superannuation limits. They also offer a number of advantages for investors seeking a tax-effective way to save for their retirement outside of the superannuation regime.”
While bonds incur a higher rate of tax (maximised at 30 per cent), they carry no restrictions on withdrawals prior to preservation age and they do not carry contribution limits, making them an alternative investment to superannuation.
“Investment bonds are a particularly attractive option for those who aim to retire prior to reaching preservation age or who aim to decrease their working hours while keeping a steady income flow available. In effect, it creates a true transition to retirement strategy outside of superannuation,” Mr Walsh said.
“They can be drawn on with a ‘deductible amount’ plus a tax offset in accordance with the individual’s marginal tax rate. Such withdrawals can be as large or small as required, and the withdrawal comprises both a capital and earnings component. The capital component is not subject to tax.”
However, while the new caps may come as unwelcome news to superannuants, HLB Mann Judd Sydney head of wealth management Michael Hutton maintained the super system will remain the most attractive retirement vehicle.
“There is no other investment opportunity that allows 15 per cent tax while accumulating, is tax free when paying a pension, has a strong investment structure and regulations, and provides asset protection,” Mr Hutton said.
“It is increasingly difficult to put large sums of money into superannuation so people really need to a find way to put smaller sums in, more frequently, early in their working life.”