Now that the government has tightened up the amount of money you can get into super via concessionally-taxed contributions, fresh strategies are called for to ensure you’re well-positioned for retirement.
Following the July 2017 cuts to super contribution caps, the annual concessional contributions cap is $25,000 for everyone. A decade ago, it was twice that for under 50s and four times that for over 50s.
Concessional contributions are made from pre-tax income and are generally taxed at a ‘concessional’ rate of 15%. Such contributions can include super guarantee payments from your employer, salary sacrifice and personal tax-deductible payments.
Despite the tightening of super contribution caps, there are still ways of investing your money tax-effectively and keep saving for retirement.
Here are five ways to manage the extra dollars that you can no longer put into super as pre-tax contributions.
1. After tax contributions
If you have already reached your concessional cap, you still have the option of contributing to super after tax.
While the non-concessional contributions cap has also been cut from $180,000 to $100,000, it still provides an avenue for putting more money into super. This is provided your total superannuation balance isn’t greater than $1.4 million, at which point further non-concessional contribution caps apply. Plus, under the bring-forward rule, you can contribute up to $300,000 in any three-year period, before age 65.
There’s no tax benefit on the way in, but there are still tax benefits on earnings within your super fund. Earnings are taxed at a maximum of 15 per cent, instead of your marginal tax rate, while some capital gains are taxed at an effective rate of 10 per cent.
If you are close to retirement and not yet 65, it’s possible to take advantage of the generous non-concessional cap and bring forward provision to move investments held outside super into your super fund.
Just don’t forget, all super funds come with conditions of release, so it’s not a place to store money you might want to get out in a hurry pre-retirement.
2. Spouse contribution
The recent change to the spouse contribution rules have made it easier to qualify for a $540 tax offset to reduce your tax. Previously the spouse income threshold was $10,800, but now if your partner earns less than $37,000 a year you may be able to claim the tax offset when you make a $3,000 contribution to their super fund (the amount reduces and phases out when your spouse’s income reaches $40,000 or if your contribution is lower than $3,000).
This isn’t just about tax. The spouse contribution – which can be made on behalf of a de facto partner or same sex partner – is a good way to boost the retirement savings of a partner who earns less or has taken time out of the workforce to care for children.
3. Investment bonds
If you need to invest outside super, and you’re in the higher tax brackets, then investment bonds are a good option.
Higher income earners on more than $87,000 could think about an investment bond.
Investment bonds, also called insurance bonds, offer a range of investment options similar to managed funds but may provide additional tax benefits. Earnings are taxed inside the fund at the 30 per cent corporate rate. Tax can be further reduced if you invest in a share fund with franking credits.
What’s more, if you hold the bond for at least 10 years, any withdrawals you make after that time are tax-free. However, also be prepared that if you make any withdrawals within the 10-year period, some of the income may be taxable, depending on when you make the withdrawal.
Investment bonds are especially useful if your total superannuation balance has reached the $1.6 million threshold, in which case you can no longer put non-concessional contributions into super, and need to find an alternative investment solution.
For many people, super’s the best tax-effective investment – you can’t beat it. But if you need to invest outside super, and you’re in the higher tax brackets, then investment bonds may be a good option.
4. Reduce your mortgage
If you are risk adverse and have a mortgage, you could consider using surplus cash flow to reduce this non-deductible debt. This can help to reduce the interest paid and term of the loan. And if your risk appetite changes over time, the equity you build up in your home can also be used to kick-start a geared investment strategy.
For example, someone with a $200,000 mortgage who receives an inheritance windfall of $100,000. If they simply invest the $100,000 outside super, they would still have a $200,000 non-deductible debt.
But if they use the $100,000 to reduce the home loan debt, they will halve their interest repayments and cut the total cost of their loan. And if they wish to invest, they can then use the new equity in their home as a deposit on an investment property or to redraw $100,000 to invest in a diversified portfolio of shares and other assets.
You’ve still got total debt of $200,000 but half is now tax deductible.
However you choose to invest the money, make sure it’s well considered for your individual circumstances. An undiversified strategy of putting all your eggs in the property market might leave you more exposed to housing market fluctuations, while using debt to invest in equities is on the riskier end of investment strategies. If unsure, always seek advice.
5. Borrow to invest
If you’re just starting out and don’t have a mortgage you could start building a diversified investment portfolio outside super. This gives you the flexibility to sell some or all of your investments for a home deposit or other spending.
Younger investors might consider borrowing to invest, albeit a high-risk strategy. But, not only do they have time on their side to repay the loan, the interest is tax deductible. Investments in Australian shares or managed share funds also come with the tax benefits of franked dividends.
If the investments are positively geared, look at investing in the name of the partner with the lowest marginal tax rate so you pay less tax on the earnings from your investments. If the investments are negatively geared then look at investing in the name of the partner with the highest marginal tax rate to get a higher tax deduction.
Want to know which approach might work best for you? Contact Bank First Financial Planning on 1300 654 193 or visit our Financial Planning page to make an appointment with one of our Senior Financial Advisers.
This article has been reproduced with permission of Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State).This document includes general advice only and does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making any investment decision. A copy of the PDS is available upon request by phoning Bank First Financial Planning on 1300 654 193.