Should we invest in shares, super, or give bonds a try?

My partner and I (48 and 45) are on the 45 per cent and 37 per cent tax brackets. We maximise our concessional contributions into super. We invest our extra cash regularly and have an $800,000 ETF portfolio outside of super. Should we continue directing future savings into our share portfolio, or instead make non-concessional contributions into super, or invest through investment bonds? I heard investment bonds have high fees and poor returns.

Superannuation and investment bonds, (also known as insurance bonds), are both tax structures. Within those tax structures you can then hold various investments, most commonly shares (including listed property), bonds, and cash.

Investment bonds can be a good option for those looking for a tax-friendly environment outside of superannuation.Credit: Simon Letch

Superannuation provides the most generous tax concessions, with income taxed at 15 per cent, in the accumulation phase, and zero tax once in pension phase. You also typically get tax concessions on money you deposit into your super fund where you claim a tax deduction.

As you point to, however, because of the generosity of these tax concessions, there are limits on how much can be deposited here.

Investment bonds operate in a somewhat similar way to superannuation. They pay tax within the bond and as a consequence investment earnings do not need to be included in your personal tax return.

The tax rate on investment bonds is 30 per cent. Where you withdraw the proceeds within the first ten years, you receive a credit for the tax paid, much like a franking credit. Depending on your personal tax rate you then either top that up or get a refund.

The fact that you have a good size portfolio outside super provides you with considerable flexibility.

If the withdrawal occurs after 10 years, the investment is considered fully tax paid, and you are not obliged to top that up if you are on a higher tax bracket. There are extra details here with years 9 and 10 of ownership having a few wrinkles, and some limitations around additions to the portfolio. This is definitely an area where you need to get professional advice.

The key takeaway however is that neither superannuation nor investment bonds, are a specific investment. How you choose to invest your money within either of these structures is up to you. It is possible to have identical investments within both structures.

Note that returns quoted by investment bonds are after tax (as are super fund returns). Because 30 per cent tax has been applied to the earnings, they will look lower than the investments that you hold in your personal name, which will express returns before tax.

Whilst tax efficiency is clearly an important consideration in deciding the appropriate investment path for you, the other considerations are preservation rules and the pension transfer balance cap that both apply within superannuation.

Money that you place in superannuation is inaccessible until you are at least 60 years of age. In your case, this is a considerable time frame. Much can change over that period of time.

The fact that you have a good size portfolio outside super provides you with considerable flexibility, but in evaluating whether to send more savings into super, you need to reflect on the potential access requirements for these monies.

Regarding the transfer balance cap. The 0 per cent tax applicable once in the pension phase of superannuation only applies for balances up to $1.9 million.

Depending on your existing account balances, forecast future contributions, and intended timing of retirement, perhaps you might already be on track to reach this level. Superannuation savings beyond this point may still offer tax benefits, but that will depend on your broader financial position.

Paul Benson is a Certified Financial Planner at Guidance Financial Services. He hosts the Financial Autonomy podcast. Questions to: [e-mail]

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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