On 1 July last year, the amount of money many Australians could put into superannuation was reduced as a result of the introduction of more restrictive contribution caps.
Consequently, some people were left asking the question - I have money or I expect to receive some money (perhaps from an inheritance or a return on an investment, for instance) that I can no longer put into super, without exceeding the caps, so where can I put it?
It’s a question that has seen a resurgence of interest in investment bonds (also known as insurance and growth bonds), with people keen to know where they might invest their money if not in super.
If it’s something you’ve been wondering about, we explain what changed, what investment bonds are, and how they differ to super in simple terms.
What changed in superannuation?
The amount many people could put into super was reduced as a result of a number of superannuation and pension changes, which came to fruition in 2017.
If you need a refresher, here are how the super contributions caps stand today.
|Contribution type||Your age||Current cap|
|Before-tax super contributions||All ages||$25,000 per annum|
|After-tax super contributions||Under 65||$100,000 per annum and up to three years’ worth of annual caps ($300,000) under the bring-forward rules|
|After-tax super contributions||65 or over||$100,000 per annum|
Also, people can no longer make any further after-tax contributions into their super once they have a total super balance of $1.6 million or above as at 30 June of the previous financial year.
If you’re 65 or over at the time of making a contribution, a work test must still be satisfied (noting the exception to downsizing contributions from 1 July 2018).
Why are people looking to investment bonds?
Investment bonds are a type of investment-savings plan, and because earnings are taxed within the bond at 30%, they’re considered ‘tax-paid’ investments.
What this means is you don’t have to worry about including the earnings you’ve made at tax time, and if you pay a higher rate of tax on your income, they could be a tax-effective way to invest and save.
Investment bonds often suit long-term investors because they’re typically designed to be held for at least 10 years, and while you may access your money before that, there could still be tax implications that you may want to consider.
Another feature of an investment bond is the ability to nominate beneficiaries, who’ll receive the proceeds of the investment bond, tax free, should you pass away.
This is why some people see investment bonds as a type of life insurance policy and why some people may refer to them as insurance bonds.
How are investment bonds taxed?
If you hold onto an investment bond for at least 10 years, you won’t have to pay additional tax at tax time on any profit that you’ve made.
That’s because investment bonds are ‘tax-paid’ investments, where earnings are taxed within the bond along the way at 30%.
What this means is any growth or income earned will not need to be included in your annual tax return, as investment bonds aren’t subject to personal tax assessment until you make a withdrawal.
If you’re paying substantially more than 30% in income tax, an investment bond may be a tax-effective structure, but if you’re paying 30%, or less, an investment bond mightn’t be tax effective at all.
When could tax implications occur?
If you decide to make a withdrawal within the first 10 years, some or all of the profit you make upon withdrawal will be taxed at your income tax rate, on top of the tax paid within the bond.
Because your earnings have already been taxed at the 30% tax rate within the bond, you will receive a 30% tax offset to reduce the amount of tax you are required to pay.
As such, the tax effectiveness of an early withdrawal will also depend on your income tax rate at the time of the withdrawal.
Another thing to note is if the amount you contribute in a particular year exceeds 125% of what you put in the year prior, the start date of the 10-year period will be reset.
How is money invested?
With an investment bond, your money is pooled with money from other investors and a portion is then invested in the investment options each investor chooses.
Investment options will vary in terms of risk, and may include things like cash, fixed interest, shares, property, infrastructure, or a range of diversified investment options.
Choosing suitable investment options will often come down to your goals and risk appetite, keeping in mind the value of the investment bond can rise or fall depending on investment performance.
How do investment bonds differ to super?
Super is often a tax effective way to save for retirement because fund earnings are taxed at a maximum 15%, while investment bond earnings are taxed at 30%.
Additional taxes might also be avoidable depending on when you take money out, but this is also the case with an investment bond, so it’s worth ensuring you’re across any withdrawal implications.
If you’ve reached your super cap limits, or expect to, something like an investment bond, may complement your savings strategy.
Investment bonds may provide additional advantages as well in that you don’t have to be a certain age to withdraw funds like you do if you want access to your super, which may be important.
Contribution caps also do not apply to investment bonds, but remember, if the amount you contribute in a particular year exceeds 125% of what you put in the year prior, the 10-year period will be reset.
Another thing to note is some investment bonds have minimum balances that must be maintained, and they do charge fees, which can vary depending on the provider and options, so do your research.
Where to go for more information
If you’ve exceeded your super cap limits or are expecting to, you may be looking at other tax-effective ways to save for your retirement, however an investment bond won’t necessarily be right for everyone.
Whether an investment bond is right for you will depend on your goals and circumstances, so speak to your financial adviser about the features, risks, costs and anything else worth weighing up.
If you don’t have an adviser but would like a bit more information, you can call AMP on 131 267 or use our online find an adviser search engine to locate someone near you.
Meanwhile, to find out what investment bonds AMP offers, you can check out our AMP Growth Bond page for more information.
While nearly nine in 10 say they have a preference, less than five in 10 have discussed their wishes with their family. What about you?