Big changes are on the horizon for superannuation tax, which could see investors flock to lower-risk investment markets like fixed income.
From 1 July 2025, some superannuation account holders will have their headline tax rate doubled from 15% to 30%. Although this is still below the top marginal tax rate of 45%, the significant increase in taxes is expected to generate at least $2.3 billion in extra revenue for the federal government in its first year.
What are the changes to the superannuation tax?
The superannuation tax (headline tax rate) will increase for those with balances exceeding $3 million. If you have a superannuation account holding less than $3 million, you will not be affected by this change, and will continue to be taxed at the current 15% headline rate.
Outlined in detail on page 15 of the Federal Budget Paper No.2, the Labor Government estimates around 80,000 superannuation holders will be impacted by the change.
However, as the new tax does not come into effect until mid 2025, and superannuation accounts close to $3 million are not included in this figure, it could end up impacting many more.
Fixed income, an attractive alternative
No matter the size of your superannuation balance, investing a portion of your nest egg in fixed income investments like corporate bonds could provide you with more confidence in funding your retirement.
Fixed income investments, can provide you with an opportunity to better plan your retirement income. Known in the industry as “defensive assets”, these investments can deliver returns for investors in the form of regular interest payments (coupon payments).
“Defensive assets” are generally lower risk investments as they generate lower returns. However, these types of investments provide predictable (fixed) income and allow investors to diversify their portfolios and “hedge their bets” against more risky investments, like equities.
When it comes to retirement planning, setting up a predictable flow of income to fund your golden years is crucial. This is why bonds and other fixed income investments can become more attractive than other alternatives investment types.
If you’d like to generate regular, predictable income in your golden years, request a call back from an ABE investment adviser here.
Are equities a good investment for retirement?
The value of equities (stocks) changes based on the volume of buy and sell trades. As the value of equities is always changing, financial and business publications are continuously reporting on these changes, speculating as to why they think that is. Ironically, this reporting can have a significant impact on the value of the equities they’re reporting on.
As buying and selling equities is heavily influenced by investor sentiment (how investors “feel” about the market), investors are constantly checking the media to decide whether they’ll buy or sell.
Even if a report is simply speculation, it can have a substantial impact on stock prices, which is just one reason why this market is so volatile.
Fixed income vs equities; Risks and returns
Due to the constant fluctuation in prices, and the fact that these prices are often influenced by “sentiment” rather than hard data, the risks involved in equity investments can be far greater.
When risks are high, so are the potential returns. However, when it comes to risk vs reward in equity investing, it all depends on choosing the right equities, keeping a keen eye on the markets, and buying or selling at the right time.
Fixed income investments on the other hand are generally lower risk, and their predictable return structures mean that investors don’t have to worry about checking markets constantly.
Corporate bonds and other fixed income investments have set maturity dates and a set principal value, provide regular payments based on a fixed interest rate (also called a coupon rate), and subject to any credit events, return the principal paid at the maturity date.
Although equity investors can be paid dividends by the company they have bought equities (shares) in, most equity investors generate most of their returns from sell trades (capital gains), based on the market price of the equities (shares).
Investors switching from equities to fixed income are capitalising on lower-risk, lower-return financial instruments like bonds, to “hedge their bets” in uncertain economic times and provide some confidence in the return on their investments.
If you’ve got experience in bond investments or are entirely new to the world of fixed income, this free webinar from the Australian Bond Exchange will explain in simple terms how investing in bonds can help you retire with confidence.
Disclaimer: The information and any advice provided in this newsletter has been prepared without considering your objectives, financial situation or needs. Because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to those things.