We have seen an increase in the number of queries from clients seeking comfort around the future of super, self managed super funds (SMSFs) and taxes for high income earners, those planning for retirement and self-funded retirees. There has been a noticeable shift in sentiment amongst people I talk to … namely a weakening in the level of trust in the government and what they may do.
High income earners, those saving for retirement and self-funded retirees were certainly NOT the winners in this year’s Federal Budget.
We can comfortably predict that people in these categories will feel the effect of:
- Rising taxes
- Low interest rates
- Investment performance will be impacted by the low interest rates
Let’s not forget that there are already been four significant impacts on high income earners and those who want to be self-funded in retirement:
- the Medicare levy has doubled over the past few years
- the highest marginal tax rate increased due to the temporary Budget Repair levy
- restrictions were placed on the amount one can put into to super
- Div 293 tax on super (in effect, a superannuation surcharge for high income earners)
When considering these changes, and factoring in increased longevity and low interest rates, a retired individual or couple need may need 25% more in retirement than they did five years ago.
So the big question becomes: What are the alternatives to Super for high income earners and those who want to be self-funded in retirement?
The short answer is: Work Longer.
The longer answer for someone leading up to retirement or post retirement, who has excess money to deploy, is to have two trust vehicles – one being a discretionary family trust (known as a “Family Trust”) and the other a super fund.
There are about half a million SMSF in Australia and a quarter of a million Family Trusts. Family Trusts have been out of favour in recent times simply because everyone is putting their money into super. However higher income earners are starting to see the limitations of super – there are a whole lot of restrictions, you can only put $35k a year in so super can only grow to a certain level, the preservation age (the age when one can access their super) will go from 55 to 60 over the next five years, and there is the over-arching risk of government meddling.
Family Trusts can offer the benefits of:
Protecting your assets
- assist in shielding your assets from the liabilities of the individual beneficiaries e.g. in the event of a family member’s business going bust)
- provide a mechanism to pass your assets to future generations
Opportunities for tax planning
- discretionary income distribution to those beneficiaries with a lower marginal tax rate and capital gains to beneficiaries with capital losses
- provide a means of access favourable taxation treatment by ensuring all family members use their income tax “tax-free thresholds”
- the trust does not need to pay tax on income distributed to its beneficiaries
- assets can pass through generations without going through your will and without being subject to certain taxes, such as capital gains tax, in the process
High income earners, pre-retirees and self-funded retirees may have to re-calibrate their retirement planning in an environment of uncertainty.
Super remains a very attractive solution (despite being subject to increasing restrictions and government meddling). Family Trusts and SMSFs are not an either/or proposition. They each have their place and we employ them in tandem for many of our clients. The Family Trust provides a sound accompaniment to a SMSF for high income earners looking to maximise their financial position and achieve financial autonomy for themselves and their family over the long term.