With constant changes to Australia’s superannuation sector, high-income earners are turning to alternative tax-effective investment structures as the “go to” investment vehicle. Financial advisers play a pivotal role in accumulating and protecting retirement savings while preserving legacies.
Saving for a happy retirement now outranks the ‘Australian dream’ of buying property as Australia’s number one financial goal¹. However, the recent host of reforms in our superannuation sector have left many questioning whether super is the right vehicle to achieve this. One of the recent changes to shake up the sector is the Government’s review of tax concessions in super, which means that earnings on super balances over $3 million will attract an additional 15 percent tax on top of the current 15 percent - thus, market references to ‘a double tax’. This proposed change begs the question: Is there a complementary, flexible, and tax-effective way to help accumulate wealth, while preserving legacies?
A taxing situation
From 2025‑26, the concessional tax rate applied to earnings for super balances above $3 million will be subject to a capped rate of 30 percent, up from the current rate of 15 percent tax on earnings. Crucially, the higher tax rate will be applied to increases in the total balance of the fund over $3 million, and not just realised profits. This change is expected to immediately impact approximately 80,000 Australians², likely to impact those holding Self-Managed Super Funds (SMSFs) and aged over 65³.
Industry bodies also expect a host of unintended consequences. For example, the latest report from the International Centre for Financial Services (ICFS) shows an estimated 13.5 percent of fund members surveyed will face “liquidity stress” in finding the money to meet higher tax obligations, exacerbated by the inclusion of unrealised gains in the measurement of taxable earnings⁴. Many SMSF members holding illiquid assets in their funds, such as property or farmland, may need professional advice to consider whether their tax burden and liquidity risk may be amplified.
With Australians now receiving super much earlier in their careers and on part-time incomes, the Financial Services Council has warned more Australians will be impacted by these reforms over time, and it may not only be a tax on the wealthy.
Coaching through change
With 5 million Australians in or approaching retirement, advisers have never had a more important role⁵. The super sector is experiencing its biggest shake-up in a decade and can no longer be relied on as the “set and forget” retirement solution people believe it to be. To navigate the ever-changing, increasingly complex retirement space, Australians could use a trusted, experienced partner to coach them through this industry evolution and lead them to solutions that deliver exceptional retirement outcomes. For High-Net-Worth (HNW) clients, this is pivotal as the super tax reforms could be costly. The measure is designed to save the Federal Budget $2 billion in the first full year and $3.2 billion over five years⁶. Based on 21/22 and 22/23 financial year modelling, this is an extra $80,000 per year additional tax burden for every HNW super member⁷.
Coaching clients through Australia’s changing retirement sector has become a critical role for advisers and the positive impacts are not to be underestimated. Research has found Australians who seek professional advice have greater retirement confidence⁸, yet we know only 10 percent of Australians are working with an adviser¹. Recent research from Generation Life has revealed 77 percent of Australians have wealth goals, but almost a third haven’t achieved any of them, largely due to a lack of professional coaching and support¹. The Government is also championing the power of advice in retirement planning and working to improve accessibility for more Australians.
When it comes to protecting our financial futures, and those of our loved ones, having access to a financial coach is vital. Australians are increasingly recognising the importance of a trusted adviser, who intimately understands their situation and acts with their best interests at heart to deliver recommendations and solutions so they can live their retirement dreams.
Protect & preserve
Generation Life’s recent research report, Reimaging Legacy, revealed that 1 in 3 Australians believe super is the best way to optimise wealth and leave a legacy, despite this not being its purpose¹. As a nation, we are at the cusp of the largest wealth transfer we have ever seen. In the coming 5 years, Australia will experience the peak of the Baby Boomer retirement surge, with over $4 trillion in assets at play; $224 billion a year is expected to be passed on as inheritances by 2050⁹.
With the constant changes to super, its role as a tax-effective investment and wealth accumulation solution is in question. There is an opportunity to explore other tax-effective structures that complement super and diversify client allocations, which can lead to better retirement and legacy outcomes for clients.
Investment bonds are becoming an increasingly popular vehicle for this as they offer a legislatively stable, tax-effective solution with flexibility, control, and a range of investment options to suit clients’ lifestyle needs. Investment bonds are not locked until preservation age and/or retirement, which means funds can be withdrawn at any time. They are popular with high-income earners seeking to reduce the impact of taxes on returns, protect assets, and want more certainty in their estate planning.
Generation Life’s proven and market-leading tax aware approach to managing investment bonds also reduces the impact of tax on clients’ returns. For clients above the 30 percent marginal tax rate, this is a game changer. Our tax-aware approach, in particular our growth-orientated investment options, can further reduce the investment bond’s long-term effective tax rate to just 12-15 percent¹⁰ (down from the headline 30 percent), with no additional investment risk. We achieve this through:
Unique investment bond structure – Reducing an investment’s tax assessable earnings by offsetting capital investment losses against income. Unlike individual taxpayers, investment bonds have specific tax rules that help reduce tax assessable earnings.
Disciplined approach to trading – When we need to sell investments, such as shares, our process ensures we effectively manage our clients’ portfolios to deliver the best tax outcome.
Reduce the impact of other investors – Where possible, we invest directly rather than accessing an investment strategy through a pooled structure, such as a managed fund. Doing this, ensures our tax position isn’t impacted by the trading decisions of other co-investors in that pooled arrangement.
Compounding returns – By reducing only 1 percent of yearly taxable earnings, it is estimated individual investors will have over 85 percent in extra returns in a 15-year period using a Global Shares Portfolio¹¹. It’s simple: the less tax paid, the more left to be invested. The compounding effect over time is significant and the longer you are invested, generally the better the after-tax outcome.
Beyond its tax-effective structure, investment bonds offer many complementary benefits to super. Investment bonds have a stable tax legislative framework, having remained largely unchanged for over 20-years. By contrast, there have been over 30 major changes to super-related legislation and government policies since the introduction of compulsory superannuation in 1992. Additionally, there are no limits on contributions and no limit on how much can be invested in an investment bond upfront. Clients can also access funds at any time, regardless of age.
Super will always be considered the primary vehicle for retirement income, and it is a valuable and effective system. However, with tax, wealth accumulation, and estate planning implications for super experiencing significant change, advisers have a fundamental role in retirement planning, empowering clients with complementary options to traditional super.
Investment bonds in action
There is no denying the positive returns investment bonds can generate when strategically incorporated into a client’s portfolio and retirement planning.
When incorporating investment bonds into clients’ portfolios, it is not an all or nothing situation. To complement returns from super, Generation Life investment bonds provide added benefits such as, having the ability to access money at any time, more control and certainty when passing on wealth, with the potential of no superannuation death benefit tax when paying to non-dependants. Investment bonds are paid tax-free upon death, regardless of who the beneficiary is.
Leaving a proud legacy
Many Australians spend a great deal of time pondering their legacy. Our research shows two-thirds of Australians are confident they’ll leave a legacy for future generations, but only 14 percent have a plan to do so¹. We know the vast majority of Australians rely on super to ensure this, but leaving a legacy cannot be something considered late in life. It must be built and protected overtime.
Financial advisers are chronically underused but essential to help Australians build a diverse financial strategy that funds a dignified retirement, while ensuring a proud legacy is straight-forward and tax-effective. Advisers are optimally placed to not only look at clients’ financial needs, but support emotional decisions and build a holistic, strategic plan that delivers the best financial outcomes.
At Generation Life, we are proud of the role we play in protecting retirement and preserving legacy. We are focused on continuing to provide tax-effective investment solutions that help Australians at every stage of life to plan for and protect financial futures. We work closely with our adviser network to understand bespoke needs and priorities, navigate individual challenges and circumstances, and ensure tailored solutions that meet specific goals and requirements. Incorporating complementary investment solutions, such as investment bonds, not only ensures superior performance and retirement outcomes but can deliver for generations to come.
In this complicated, ever changing economic environment, Australians need more support than ever. That’s where a trusted adviser comes in. Clients lean on advisers to understand the options available to them as they plan for the next phase of life and to tailor a strategy that best suits their goals and objectives.
Generation Life’s experienced team of wealth experts are well-placed to support advisers and clients to navigate the rapidly evolving super and retirement landscape, while incorporating tax-effective investment solutions that can protect and preserve financial futures. Together, we can help ensure that Australians set themselves up for success and the retirement of their dreams before they reach their golden years.
