Michael Blake

Centuria LifeGoals, Centuria Life’s new investment bonds product, has been awarded a rating of ‘Very Strong’ by Australia Ratings. Centuria Life is part of specialist investment manager Centuria Capital Group (Centuria, ASX: CNI).

The ‘Very Strong’ ranking reflects the ratings agency’s “very strong level of confidence that the product can deliver a well-managed, robust investment structure to investors”.

LifeGoals, which launched in February this year, offers 22 high-quality complementary fund options – including sector, diversified and index funds – managed by rigorously selected investment managers. The offering has a transparent fee structure, in which all rebates are passed on to the investor, and offers a simple, flexible and tax effective investment vehicle.

Michael Blake, Head of Centuria Life, said: “The Australia Ratings report recognises ‘a modern take on the traditional investment bond structure that has achieved its objective of being a product that can provide investment, tax planning and estate planning in one solution’.

We feel this rating is a fair and accurate reflection of our offering. The report notes that ‘The benefit to investors is that the Investment Options are selected from a wide universe of available investment funds based on a rigorous due diligence process’ and this has always been our aim – to offer investment options that are consistently amongst the best available in each asset class to make it simpler for investors to choose.”

A solution for the times

Mr Blake believes that appetites around investments are changing – for the better – and that it is the responsibility of financial service providers to respond – or lose out. Due to their tax effective nature and ease of access to funds, investment bonds should be combined with superannuation as a part of most individuals long-term wealth creation plans. “Investors and financial planners demand greater fee transparency, access to high-quality managers and simplicity in their financial products. Today, products will succeed or fail based on merit, and investors expect total control and ease of use. We are delighted that Australia Ratings recognises that LifeGoals was designed for investors with this front of mind.”

Chris Dalton, Managing Director of Australia Ratings, said: “The Centuria LifeGoals product is a well thought out product that will appeal to many investors and financial planners as a viable complement to superannuation as a long-term savings product with the added flexibility of accessibility to funds.”

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The new product offers:

• 22 high quality fund options – including sector, diversified, and index funds – managed by rigorously selected investment managers
• A transparent fee structure, with rebates passed on to the investor
• Greater control, with a simple online application process and easy in-app management
• A simple, flexible and tax-effective investment solution that aims to grow accessible wealth for investors

Michael Blake, Head of Centuria Life, said: “The first guiding principle of Centuria LifeGoals is to offer high-quality, complementary funds which have been carefully selected by our investment committee.”

Mr Blake believes the benefits and control of the new investment bonds products will see them experience a resurgence in popularity.

“The current climate means more demand than ever for transparent financial products that are sold on merit, and that place control and clarity in the hands of the investor and the adviser. Centuria LifeGoals does exactly that,” Mr Blake said.

John McBain, Centuria Group Chief Executive Officer, said: “Centuria has always taken an investor-first approach – we know what matters most to our investors and we look after their interests as if they were our own. We put investors first and, in our experience, everything else follows.

“Centuria LifeGoals was built on this philosophy and is well-suited to advisers and investors looking for true competitive value.”

An industry facing change

The Australian financial services industry currently faces significant structural change, with many financial planners seeking to re-position themselves to best service their clients and many organisations looking to exit wealth management.

This shift, which has already occurred overseas, has gained momentum in Australia following revelations from the present Commissioner Hayne’s enquiry (more of which may soon come in the Royal Commission’s final report).

Mr Blake said “We are entering a new generation of financial services in Australia: various developments have created an environment where Australians are going to be more discerning customers than ever, looking extremely closely at existing and proposed financial products. We welcome the scrutiny – with Centuria LifeGoals, what you see is what you get.

“There are thousands of financial advisers in this country who care deeply about their clients’ wellbeing – I have witnessed this firsthand, and I believe they too welcome the changes that are already occurring.”

In addition, while previously Australian investors were encouraged to maximise superannuation contributions and could access superannuation funds at 55 years of age, recent changes have placed restrictions on contributions and fund balances, and changed age thresholds. These, alongside the potential for future changes, mean superannuation by itself is no longer a sure bet for investors to rely on.

By contrast, investment bonds give investors access to a sound, long-term investment with a structure that offers tax benefits, flexibility and accessibility.

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“Australians will now have more money in their pockets as a result of the changes to personal tax rates announced in tonight’s Budget. While it may seem a modest amount to households, in fact with low and middle income earners set to be have up to $530 more a year, this is a great opportunity to save this extra money. $500 is enough to invest in a vehicle such as an investment bond, and reap the benefits in the future.

“As the Treasurer has pointed out, retirement income should be a priority for all Australians, and we all have other important interim long-term financial goals we continue to aim towards, that make all the difference to Australian lives.

“We know that an effective way to do this is with ‘set-and-forget’ type vehicles, such as investment bonds. Investment bonds are highly tax-effective as they are taxed at the company tax rate of 30%, rather than the investor’s personal rate, and if they are held for 10 years, proceeds are distributed tax free.

“Vehicles like investment bonds that offer the advantages of compound interest, are flexible – allowing for additional contributions each year and access to the funds at any time – and offer very low barriers to entry, continue to be great complimentary options to super that people should consider in this environment.”

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In the past year there have been several changes that may have impacted your clients’ estate planning strategies

There’s nothing certain in life but death and taxes, so the adage goes…however, another certainty is change – particularly when it comes to the financial services regulatory landscape.

In the past year there have been several changes that may have impacted your clients’ estate planning strategies, and more change is in the wings. In this article, Centuria explores those changes and the potential impacts for clients.

The importance of estate planning

Regardless of change, nothing impacts the importance of a sound estate plan. While a financial plan focuses on creating and preserving wealth, an estate plan defines how an investor wants their assets to be managed during their lifetime, and importantly, how they want them disbursed after death. The plan also deals with the weighty decision as to who will look after your clients’ estate.

Estate planning should be considered early in the financial planning process. As illustrated, the phases of the financial planning and estate planning processes overlap. For example, wealth building plays a significant role throughout retirement to help manage longevity and inflation risks.

Poor estate planning can have a significant impact on the value of the estate and the beneficiaries:

• the estate could be distributed to unintended beneficiaries
• high legal fees could be incurred to collect all the assets
• any disputes can result in lengthy delays in accessing estate proceeds
• erosion of wealth due to tax implications, reducing the value of the estate.

Such consequences can result from having no estate plan, or when estate protection and planning is considered as the final phase, once investment decisions have been made.

Change and its impact

A range of changes, both implemented and proposed, can and will impact estate planning. This reinforces the fact that estate planning is not a ‘set and forget’ strategy, rather it’s one that should form part of your regular client review.

Super changes 2017

Last year the Federal Government introduced a range of changes; these changes not only had consequences for your clients’ retirement, but also for their estate planning.

1. The transfer balance cap of $1.6 million on retirement balances

Following the introduction of these amendments, an individual can now transfer only $1.6 million into retirement phase accounts; any excess had to be withdrawn and invested elsewhere. The changes not only impose limits on the amount a person can have in their superannuation retirement pension account, but also limits the amount a member can receive from their deceased spouse’s pension account. This is because the deceased’s pension now counts towards the surviving spouse’s transfer balance cap, something which has to be considered when developing an estate plan.

2. Changes to concessional and non-concessional contribution caps

Three key changes came into effect on 1 July 2017:

• a reduction in concessional (pre-tax) contributions from $30,000 to $25,000
• higher concessional caps for the over 50s no longer exist
• the annual non-concessional (after-tax) contributions cap has been cut to $100,000; it is only possible for investors to make non-concessional contributions if their super balance is less than $1.6 million.

3. Lowering of the income threshold from $300,000 to $250,000 for 30% rather than 15% tax on contributions

This means that any Australian with an income of $250,000 p.a. or more now pays 30%, double the usual tax rate of 15%, on contributions into super.

4. The tax-exemption for transition to retirement pensions (TRIP) will be removed

The upshot of this change is that super fund earnings supporting a transition to retirement pension is no longer be tax-exempt.

These changes have particularly impacted higher net worth individuals and have seriously curtailed the ability to contribute lump sums into super. Finding an effective wealth building vehicle that also provides estate protection and estate planning opportunities is important.

Proposed changes to super

It seems that last year’s changes to super may not be the last. A recent keynote address^[1] delivered by Senator Hon Kristina Keneally at the FSC BT Political Series Breakfast suggest a Labor government has several policies directly targeted at superannuation. As with the changes introduced in 2017, each has the potential to impact your clients’ retirement and estate planning strategies. The changes flagged by Keneally include:

1. Changes to the dividend imputation system, which have already received significant media attention.
2. Discretionary trust reform – discretionary trusts are used by many investors as estate planning vehicles. While the quantum of change has not yet been declared, it’s a structure that’s on the ALPs radar.
3. Changes to catch up concessional contributions – the speech mentioned opposition to these measures, however it’s not clear whether catch up contributions will be reduced or eliminated.
4. Lower the non-concessional contribution cap further, from $100,000 to $75,000
5. Lowering the income threshold further, from $250,000 to $200,000 for which 30% rather than 15% tax on contributions is paid.

While there’s no timeline in place, and of course, an election to occur and legislation to be passed, it’s reasonable to expect further change, whichever party is elected.

The ‘Marriage Amendment (Definition and Religious Freedoms) Act 2017’

Changes to the Marriage Act late last year allow same sex couples to marry; it also recognises those marriages legally enacted overseas. In all Australian states and territories, marriage renders any previous Will invalid, and in all but Queensland, also nullifies Powers of Attorney.

If a new Will is not written once the couple has married, in the event of the death of one partner, they will be deemed as being intestate. This may result in that person’s assets being distributed to unintended beneficiaries, rather than in line with the intentions of the deceased.

Prior to the change in the Marriage Act, many same-sex couples in long-term relationships had drawn up legal and financial agreements to cover all eventualities; such agreements should also be reviewed to ensure their validity and that the estate planning needs of the couple are met.

Investment bonds and estate planning

An investment bond is an insurance policy, with a life insured and a beneficiary; however, it operates like a tax-paid managed fund. And as with a managed fund, you can make recommendations to your client from a broad range of underlying investment portfolios. These typically range from growth-oriented assets, such as equities, to defensive assets such as fixed interest. They can also include other asset classes and combinations of assets.

Tax effective

Importantly for estate planning, an investment bond is a tax effective structure. With most other investment structures however, when a beneficiary takes an inheritance in their name, tax is generally payable on income generated from the inheritance at their personal marginal tax rate.

With investment bonds, tax is paid within the investment bond rather than personally by the investor. The maximum tax paid on the earnings and capital gains within an investment bond is 30%, although franking credits and tax deductions can reduce this effective tax rate. This makes them an attractive investment option for high income earners.

A key feature of investment bonds is that if the investment is held for 10 years, no personal tax is paid by the investor. However, if the investment is redeemed within the first 10 years, the investor will pay tax on the assessable portion of growth as shown in figure one.

Transfer of ownership

The ownership of the investment bond can be easily assigned or transferred at any time. The original start date is retained for tax purposes. This may not be achieved within a company structure without creating tax liabilities.

Beneficiaries

Investment bonds provide investors with freedom to nominate anyone as a beneficiary in the event of their death. They fall outside of the estate, so are not distributed according to the will, nor are they affected if the owner dies intestate.

Tax-free to nominated beneficiary/ies

Investment bonds are paid tax-free to the nominated beneficiary/ies. Depending on the age and life stage of the beneficiary/ies, the funds can then be:

• reinvested in a new investment bond
• transferred into the recipient’s retirement phase superannuation account, as long as it will not exceed the $1.6 million transfer balance cap
• used to make additional superannuation contributions up to the recipient’s relevant contributions cap.

Investment bonds versus other investments

An investment bond may provide greater simplicity and control over death benefits than other investment products such as unit trusts, shares or term deposits.

Upon death, most investment products form part of the estate and may be caught up in any actions taken against the estate. It is also left to the executor to make decisions about the distribution in accordance with the terms of the will.

These actions usually cannot be undertaken until probate or letters of administration are obtained, which means the entire process can take months or even years if the estate is complicated or being disputed.

Once distributions are made, tax may be payable by either the estate (if assets are sold) or the beneficiary when assets that are received in-specie from the estate are subsequently sold.

In contrast, the death benefits from an investment bond can be directed to a nominated beneficiary. Investment proceeds are paid tax-free to dependant and non-dependant beneficiaries, regardless of how long the investment has been held.

Building wealth in an investment bond may reduce the risk of disputes over estates and enable the benefits to be paid more quickly. The advantages of an investment bond in an estate protection and planning strategy are summarised in figure two.

Blended families

Investment bonds are suitable for blended families that have separate estate planning needs, as outlined in the following case study. The investment structure gives parents certainty that their nominated beneficiaries will receive their bequest without challenge from other family members.

Case study – a blended family

Lisa (67) and Andrew (72) are married. For both it is their second marriage, and each have children from their first marriage; Joan has three children and Brian has two.

Lisa’s main estate planning issue is to leave her non-superannuation assets, which were accumulated during her first marriage, to her three children. She considers investing her non-super assets into an investment bond, with those three children as beneficiaries.

Lisa remains the owner and life insured, and because investment bonds provide the flexibility to withdraw funds at any time, she continues to have access to the funds if necessary.

If Lisa is alive when the investment bond matures, she can reinvest the proceeds for a further ten years, knowing that upon her death, the funds are paid tax free to the beneficiaries, her three children.

While unit trusts, shares or term deposits are traditional options for wealth building, they form part of the estate upon death, and distribution can be complex and open to dispute from other parties, such as Andrew’s children. Investment bonds however, provide greater simplicity and control over death benefits.

For those concerned with estate planning, investment bonds are structured to allow investors to create certainty with respect to their wishes about passing on wealth. Investors can nominate beneficiaries who then receive benefits directly and free of personal income tax liability. Investment bonds enable your clients to combine wealth building and estate planning to ensure they get the right assets, into the right hands, at the right time, irrespective of regulatory change.

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[1] Held Wednesday 4 April 2018

Disclaimer: Centuria’s Investment Bonds offer a tax effective investment vehicle outside of superannuation. They have features that investors should consider if they wish to invest outside of superannuation. Suitability of an investment in a Centuria Investment Bond will depend on a person’s circumstances, financial objectives and needs, none of which have been taken into consideration in this advertisement. Prospective investors should obtain and read a copy of the Product Disclosure Statement (PDS) and consider the information in the PDS in light of their circumstances, objectives and needs before making a decision to invest. We recommend that prospective investors consult with their financial adviser.  This document is not an offer to invest in any of Centuria’s Investment Bonds. Investment in Centuria’s Investment Bonds are subject to risk as detailed in the PDS. Centuria will receive fees in relation to an investment in its Investment Bonds. Issued by Centuria Life Limited ABN 79 087 649 054 AFSL 230867.

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Michael has been at Centuria since the beginning of 2016, serving as Head of Sales and Marketing. With three decades of experience in funds management, property and financial services to bring to the role, Michael has passion and a vision for the future of Centuria’s investment bonds business. He is committed to a growth strategy that aligns with the overarching strategy of Centuria Group as a whole.

In funds management since 1990, Michael’s knowledge of the financial services industry, and his relationships with key industry groups uniquely position him to grow the business.
John McBain, Group CEO, says of the appointment “We are incredibly fortunate to have an in-house candidate with the communications and market knowledge, and financial skills, to step into this role. Michael will build on the strong foundations for evolution and growth put into place by Neil Rogan, who has resigned after a successful three-and-a-half year tenure in the role.

“We have invested in building market understanding of the case for, and use of, bonds as a means of creating, transferring, and protecting wealth. Growth potential for the Investment Bonds market is solid, due in part to favourable tailwinds from market and policy changes such as the recent changes and limitations to superannuation.

“Michael has the specialised qualifications, experience, and skills to take this business into its next phase.

“We want to thank Neil for his contribution to the business and its clients. Neil drove Centuria Life’s growth to make it Australia’s third largest player,^[1] raise the profile of the product, and bring it up-to-date for a new generation of investors. Neil grew Centuria Life by over 22% during his time,^[2] and played a significant role in educating the market on this product.”
Michael Blake has further commented, “It is with great excitement that I step into this role, and I look forward to further building the success of the business and helping more investors to understand and gain access to this unique product.

“I have great belief in this product as an accessible and reliable tool for all Australians to effectively conserve and grow their wealth and achieve their financial goals, and it is with relish that I look ahead to creating the next stage of Centuria Life’s 35-year journey in helping them do so. I think this product has an important and growing role in the market and I will continue to develop our offering to best serve our investors.”

Michael was previously Director of Cromwell Funds Management, Director of New Zealand based Oyster Property Group, Director of Phoenix Portfolios and a member of the Group’s Executive Management Committee. There he was responsible for growing and managing the funds management business and strategically presenting the product offering to a changing market. He also held senior management roles at HSBC Asset Management, Zurich and Mercantile Mutual.

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[1] Based on Net FUM figures from Sep-14 to Dec-17.
[2] Ibid.

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At a time when life expectancy is increasing, your clients may want to take advantage of planning for the best future possible.

Australians are living longer but many are failing to plan for it, new research from National Seniors Australia shows. The report, Hope for the best, plan for the worst? Insights into our planning for a longer life, suggests that many are resigned to outliving their savings. At a time when life expectancy is increasing, Centuria examines investment strategies outside of superannuation your clients may want to take advantage of planning for the best future possible.

A better standard of living – good healthcare, nourishing food, access to dental care, exercise, housing – all contribute to the longevity being enjoyed by the Australian population. According to the Australian Bureau of Statistics (ABS)^[1], such improvements, coupled with developments in social and economic standards, have resulted in larger gains in life expectancy over time for those aged 65 years and over – the traditional retirees. As illustrated in figure one, the gains in life expectancy over the last 20 years have been considerable.

The Treasury’s 2015 Intergenerational Report found that Australians will live have one of the longest life expectancies in the world; in 2054-55, life expectancy at birth is projected to be 95.1 years for men and 96.6 years for women, compared with 91.5 and 93.6 years today.

The structure of Australia’s population will also continue to change, with a greater proportion of the population aged 65 plus. This not only has implications for Australians saving for retirement, but also for the government, which supports those with insufficient savings.

The Productivity Commission Government Services Report, released January 2018, revealed that governments (state and federal) spent $17.4bn on aged care services in the 2016-17 fiscal year – a number that will surely grow as Australia ages, particularly if retirement savings aren’t sufficient to cover an addition twenty-five plus years post retirement.

Aware…but are they planning for it?

As illustrated in figure two, 85% of people aged 50+ surveyed by National Seniors Australia said they were aware that ‘life expectancy at age 65 had increased by around 6 years over the last 30 years’.

The research found that what mattered most to people about their finances in retirement was having regular, constant income to meet their essential needs. While the majority were aware of living longer, 22% of survey participants disclosed that they ‘hadn’t planned at all’ for an increasing lifespan, and only 50% had made financial plans for a longer life[2].

One of the more interesting findings was the median asset balance – of the 5,770 Australians aged 50+ surveyed, the median retirement savings balance was $300,000[3]. This is significantly lower than the Association of Superannuation Funds (ASFA) estimates of $545,000 ($600,000 for couples) for a comfortable lifestyle to age 90.

The ASFA retirement standard suggests that a single person would need $43,665 per year and a couple $59,971 to enjoy a ‘comfortable’ lifestyle. Retirement savings of $300,000 would be unlikely to generate those cash flows over the course of a ‘normal’ retirement, which can now span 25+ years.

Meanwhile, the 2016–17 Multipurpose Household Survey (MPHS)[4] undertaken by the ABS examined retirement intentions and retirement funding. The research found that of the 3.9 million persons in the labour force who indicated that they intended to retire, 40% did not know the age at which they would retire (36% of men and 44% of women). Those who did have a planned age of retirement fall into the categories:

• 20% intend to retire 70 years and older (22% of men and 18% of women)
• 50% intend to retire between 65 and 69 years (53% of men and 47% of women)
• 23% intended to retire between 60 and 64 years (19% of men and 27% of women)
• 7% intended to retire between 45 and 59 years (6% of men and 8% of women).

The average age at which persons intended to retire was 65 years (65.5 years for men and 64.4 years for women). These retirement intentions are evidently driven by issues of financial security, as illustrated in figure three.

So, Australians are living longer, are concerned about financial security but typically, not all that good at planning for their post-retirement lifestyle – particularly when it comes to the later years, which are often characterised by the need for increased spending on medical care or residential facilities. National Seniors Australia’s research found the intention to spend retirement income paid little or no attention to later old age where there can be significant costs.

Last year’s changes not so super

The changes to superannuation introduced on 1 July 2017 have made it harder for people, particularly those approaching retirement, to load up their super savings and take advantage of super’s tax effective environment.

From that date, the federal government imposed limits on the amount that can be contributed to super in each financial year before extra tax is payable. For those clients who haven’t yet reached the $1.6 million transfer balance cap, they have a $25,000 concessional cap and a $100,000 non-concessional cap per annum. If they are close to retirement and looking to fund an additional 25+ years of a ‘comfortable’ lifestyle, they may need additional savings.

How then, can a client who needs to build up retirement savings, do so in a tax effective way?

Investment bonds – a tax effective way to save for retirement

An investment bond is a tax effective structure. Like superannuation, tax is paid within the investment bond rather than personally by the investor. The maximum tax paid on the earnings and capital gains within an investment bond is 30%, although franking credits and tax deductions can reduce this effective tax rate. This, along with the following benefits, make investment bonds an attractive investment option, particularly for high income earners.

#1 Tax free after 10 years

If an investment bond is held for 10 years, no personal tax is payable by the investor. However, if the investment is redeemed within the first 10 years, the investor will pay tax on the assessable portion of growth as shown in figure four.

Investment bonds could be established to mature at different milestones in retirement – five years in, seven years in, 10 years in…this way, your client can be sure of regular sums at regular intervals to supplement their superannuation and fund a comfortable retirement and allow for changing needs at different life stages.

#2 No limit on contributions

To contribute to superannuation an investor needs to meet eligibility rules. This requires the investor to be under age 65 or, if aged 65 to 75, they need to meet a work test. If eligible, contribution caps will limit the amount of contributions that can be made to superannuation.

There is no limit on the amount that can be invested to establish an investment bond, and investors can make subsequent investments up to maximum of 125% of the previous year’s contribution without restarting the ten-year period. Investors can choose to start a new investment bond if higher amounts are to be subsequently invested – or if they would like to target specific maturity dates throughout their retirement.

Investment bonds can provide a tax effective means of investing and avoid excess contributions tax that may otherwise apply in the case of superannuation contributions post 1 July 2017.

#3 No access restrictions

Unlike superannuation investments, investment bonds are not subject to preservation. This means that investors can access savings before age 55; this makes investment bonds an ideal vehicle if a client is looking to fund an early retirement and doesn’t want to incur the penalties associated with early access to superannuation.

#4 Tax free for beneficiaries

Investment bonds provide investors with the freedom to nominate anyone as a beneficiary in the event of their death. Beneficiaries are not limited to ‘dependants’, as is typically required for superannuation investments and importantly, receive the proceeds of an investment bond tax free, regardless of the length of time it has been invested – no need to wait for the 10 years to be up.

When compared to other investment vehicles, investment bonds are an ideal means through which clients can save in a tax effective manner to supplement their superannuation. Using investment bonds, your clients can build up savings to fund each stage of retirement, to ensure it is enjoyable and comfortable, however long they may live

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[1] 3302.0.55.001 – Life Tables, States, Territories and Australia, 2014-2016
[2] Hope for the best, plan for the worst? Insights into our planning for a longer life – February 2018
[3] Hope for the best, plan for the worst? Insights into our planning for a longer life – February 2018
[4] http://www.abs.gov.au/ausstats/abs@.nsf/mf/6238.0

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Disclaimer: Issued by Centuria Life Limited (Centuria) (ABN 79 087 649 054, AFSL 230 867). The information in this article is general information only and does not take into account the financial circumstances, needs or objectives of any person. Centuria offer a range of investment bonds, each of which are issued under a product disclosure statement (PDS) that is available on Centuria’s website. An investment in any of Centuria’s investment bonds carries risk, the level of which will vary depending on the assets held and the investment strategy and objectives of each bond. Risks relating to an investment may lead to loss of income or capital invested. The risks relating to an investment are detailed in the PDS and Centuria strongly recommends that the PDS be downloaded and read before any investment decision is made. Centuria receives fees from investments in its investment bonds

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Neil Rogan

“The recent tax hikes on contributions to super have significantly eroded the potential retirement savings of many Australians. Super isn’t necessarily the most tax-effective savings plan out there anymore.”

These are the words of Neil Rogan, a specialist in investment management and General Manager – Investment Bonds Division at Centuria Life following the latest in a range of ever-eroding super changes and the news that Bill Shorten has discretionary (family) trusts in his sights. If these are taxed at 30% as per his policy, there are very few tax-effective investment structures left.

Family trusts, even without a new tax, have some potential drawbacks

Family trusts, even if left untouched, which is far from certain, do not provide the same long term flexibility and simplicity as an investment bond. Family trusts work well to distribute income to family members on lower tax rates, but as soon as children over the age of 18 who are at University and earning less money begin to work, and earn money, all the income distribution from a family trust does is create a tax problem for them. This is never the case with an investment bond.

And creating a trust and maintaining it is complicated, expensive and there are ongoing regulatory obligations.

Company structures just delay, not get rid of tax

Company structures have similar drawbacks, and really all they do is kick the tax liability down the road. They don’t do away with it.

Investment bonds are as tax-effective as super, more tax-effective than trusts or company structures and carry low regulatory risk. Why wouldn’t you consider one.
Investment bonds are not-only just as tax-effective as super, but are more flexible, simpler to administer and can be transferred tax-free to whoever you choose. And they have a low regulatory risk. Unlike super, and potentially family trusts.

“Australians are right to be concerned about Bill Shorten’s recent comments about changing the tax law as it relates to family trusts. With tax hikes and limits on contributions to super already in place, if discretionary trust fall under the Opposition’s hammer, investors will have very few tax-effective savings options left.

“That’s why investment bonds are worth a look now more than ever. They have low regulatory risk and the tax benefits can be at least as good as super, sometimes better. And they are simple, flexible, cheap to set up and you can access your money at any time,” says Mr Rogan.

How investment bonds work:

• Investment bonds operate like a tax-paid managed fund. Tax is paid at the corporate rate of 30% within the bond structure. Depending on the underlying assets in the bond, effective tax could even be less.
• Returns are re-invested in the bond and not distributed, and if this is maintained for 10 years, all proceeds are distributed tax free.
• Additional contributions can be made throughout the life of the bond, up to 120% of the previous year’s contribution.
• Because an investment bond is in structure an insurance policy with a life insured and a nominated beneficiary, funds can be transferred to a beneficiary tax free, and do not form part of the investor’s estate.
• When super is passed on to non-dependent adult children, it is taxed at the rate of 17%, an investment bond’s proceeds are tax free.

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This article from Centuria looks at how the changes to superannuation, which come into effect 1 July 2017, will impact estate planning, and considers strategies to ensure your clients’ plans are effective.

An estate plan defines how an investor wants their assets to be managed during their lifetime, and importantly, how they want them disbursed after death. The plan also deals with the weighty decision as to who will look after your clients’ estate.

Estate planning should be considered early in the financial planning process. As illustrated, the phases of the financial planning and estate planning processes overlap. For example, wealth building plays a significant role throughout retirement to help manage longevity and inflation risks.

Poor estate planning can have a significant impact on the value of the estate and the beneficiaries:

• The estate could be distributed to unintended beneficiaries
• High legal fees could be incurred to collect all the assets
• Any disputes can result in lengthy delays in accessing estate proceeds
• Erosion of wealth due to tax implications, reducing the value of the estate

Such consequences can result from having no estate plan, or when estate protection and planning is considered as the final phase, once investment decisions have been made.

How will the impending changes impact estate planning?

There are several changes that can potentially impact estate planning:

1. The transfer balance cap of $1.6 million on retirement balances

Effective from 1 July 2017, an individual will be able to transfer only $1.6 million into retirement phase accounts. For the small number of Australians with a balance of more than $1.6 million in a retirement phase account now, they will need to withdraw the excess balance or revert it to accumulation phase, where it will be subject to 15% earning tax.

The upcoming changes not only limits the amount a person can have in their superannuation retirement pension account, but also limits the amount a member can receive from their deceased spouse’s pension account. This is because the deceased’s pension will now count towards the surviving spouse’s transfer balance cap.

2. Changes to concessional and non-concessional contribution caps from

There are three main changes:

• A reduction in concessional (pre-tax) contributions from $30,000 to $25,000
• Higher concessional caps for the over 50s will not exist after July 2017
• The annual non-concessional (after-tax) contributions cap has been cut to $100,000; it is only possible for investors to make non-concessional contributions if their super balance is less than $1.6 million.

3. Lowering of the income threshold from $300,000 to $250,000 for 30% rather than 15% tax on contributions

This means that any Australian with an income of $250,000 p.a. or more will pay 30%, double the usual tax rate of 15%, on contributions into super.

4. The tax-exemption for transition to retirement pensions (TRIP) will be removed

The upshot of this change is that super fund earnings supporting a transition to retirement pension will no longer be tax-exempt.

These changes will particularly impact higher net worth individuals, and seriously curtail the ability to contribute lump sums into super in the future. Finding an effective wealth building vehicle that also provides estate protection and estate planning opportunities is important.

How can investment bonds help in estate planning?

An investment bond is an insurance policy, with a life insured and a beneficiary; however, it operates like a tax-paid managed fund. And as with a managed fund, you can make recommendations to your client from a broad range of underlying investment portfolios. These typically range from growth oriented assets, such as equities, to defensive assets such as fixed interest. They can also include other asset classes and combinations of assets.

Importantly for estate planning, an investment bond is a tax effective structure. Like superannuation, tax is paid within the investment bond rather than personally by the investor. The maximum tax paid on the earnings and capital gains within an investment bond is 30%, although franking credits and tax deductions can reduce this effective tax rate. This makes them an attractive investment option for high income earners.

A key feature of investment bonds is that if the investment is held for 10 years, no personal tax is paid by the investor. However, if the investment is redeemed within the first 10 years, the investor will pay tax on the assessable portion of growth as shown in figure one.

For those concerned with estate planning, investment bonds are structured to allow investors create certainty with respect to their wishes regarding passing on wealth. Investors can nominate beneficiaries who then receive benefits directly and free of personal income tax liability.

There are several benefits that make investment bonds an ideal tool for estate planning.

No limit on investment amount

The contribution caps will limit the amount of contributions that can be made to superannuation, however there is no limit on the amount that can be invested to establish an investment bond. Investors can make subsequent investments up to maximum of 125% of the previous year’s contribution without restarting the ten-year period. Investors can choose to start a new investment bond if higher amounts are to be subsequently invested.

Investment bonds can provide a tax effective means of investing and avoid excess contributions tax that may otherwise apply in the case of superannuation contributions post 1 July 2017.

Transfer of ownership

The ownership of the investment bond can be easily assigned or transferred at any time. The original start date is retained for tax purposes. This may not be achieved within a company structure without creating tax liabilities.

Beneficiaries

Investment bonds provide investors with freedom to nominate anyone as a beneficiary in the event of their death. They fall outside of the estate, so are not distributed according to the will, nor are they affected if the owner dies intestate.

Paid tax-free to nominated beneficiary/ies

Investment bonds are paid tax-free to the nominated beneficiary/ies. Depending on the age and life stage of the beneficiary/ies, the funds can then be:

• Reinvested in a new investment bond
• Transferred into the recipient’s retirement phase superannuation account, as long as it will not exceed the $1.6 million transfer balance cap
• Used to make additional superannuation contributions up to the recipient’s relevant contributions cap.

Investment bonds versus other investments

An investment bond may provide greater simplicity and control over death benefits than other investment products such as unit trusts, shares or term deposits.

Upon death, most investment products form part of the estate and may be caught up in any actions taken against the estate. It is also left to the executor to make decisions about the distribution in accordance with the terms of the will.

These actions usually cannot be undertaken until probate or letters of administration are obtained, which means the entire process can take months or even years if the estate is complicated or being disputed.

Once distributions are made, tax may be payable by either the estate (if assets are sold) or the beneficiary when assets that are received in-specie from the estate are subsequently sold.

In contrast, the death benefits from an investment bond can be directed to a nominated beneficiary. Investment proceeds are paid tax-free to dependant and non-dependant beneficiaries, regardless of how long the investment has been held.

Building wealth in an investment bond may reduce the risk of disputes over estates and enable the benefits to be paid more quickly. The advantages of an investment bond in an estate protection and planning strategy are summarised in figure two.

Case study – a blended family

Joan (68) and Brian (73) are married, for both it is their second marriage and each have children from their first marriage; Joan has four children and Brian has two.

Joan’s main estate planning issue is to leave her non-superannuation assets, accumulated during her first marriage, to her four children. She considers investing her non-super assets into an investment bond, with her four children as beneficiaries.

Joan remains the owner and life insured, and because investment bonds provide the flexibility to withdraw funds at any time, she continues to have access to them if necessary. If Joan is alive when the bonds mature, she can reinvest them for a further ten years, knowing that upon her death, the funds are paid tax free to the beneficiaries, her four children.

Estate planning is a critical component of the financial planning process. A sound plan will define how an investor wants their assets to be owned, managed and preserved during their lifetime and, importantly, how they want them disbursed after their death. The different treatment of assets upon death can materially affect a surviving spouse’s superannuation accounts under the new regime, and have a serious impact on the tax liabilities of beneficiaries. The unique features of investment bonds make them worthy of consideration when estate planning for your clients.

The post Estate planning in the post 1 July 2017 world appeared first on AdviserVoice.

Neil Rogan

It’s time to seriously consider tax-effective options outside of super.

According to Neil Rogan, General Manager of Investment Bonds for Centuria, time is running out for Australians likely to be affected by changes to superannuation which come into effect on 1^st July 2017. He warns advisers and their clients to take stock of what the changes might mean for them, and what, if anything, can be done about it.

Two groups of Australians are most likely to be affected by the changes to super: those with large superannuation balances, either in the accumulation or retirement phase; and those on the highest marginal tax rate. Both groups may find themselves with excess funds that they are unwilling to keep within the superannuation system.

The good news is there are tax-effective investment options outside of super. It’s just a question of assessing which are right for you.

I have summarised below the changes – and who will be most affected.

Australians with large super balances are a target and tax-free retirement phase balances over $1.6 million will need to be transferred out.

Australians with large super balances have been targeted because the Government has ruled that super should be a way for all Australians to fund their retirement, not a way for the wealthy to accumulate large sums in a tax-advantaged environment. Or to pass on to the next generation.

Excess funds may be transferred back to an accumulation fund (within the super system) or outside of the system altogether.

Non-concessional contributions to super of $540,000 over 3 years are now a thing of the past.

Non-concessional contributions to super will now be limited, and not possible at all for some. This is because non-concessional contribution are tax-advantaged once in super, even though they have had tax paid on them before they entered the system.

From 1 July 2017, annual non-concessional contributions must not exceed $100,000 per annum – a maximum of $300,000. And you can only make non-concessional contributions at all if you have a super balance of less than $1.6 million.

Tax hikes for high earners and penalties for contributing more than $25,000 p.a. to super.

High earners are affected by higher tax rates and lower thresholds for concessional contributions.

Anyone earning over $250,000 p.a. will pay 30% on contributions to super, double the usual contributions tax. In addition, the general concessional contributions cap will be lowered from $30,000 to $25,000 p.a.

So, what can those affected by the changes do?

It is worth considering investing excess funds in alternative tax-effective structures if you or your clients have:

• Over $1.6 million in a retirement phase account and need to transfer it out or
• Have hit the $1.6 million limit in non-concessional contributions.

High income earners will find themselves paying double tax on their concessional contributions (if they earn $250,000 pa or more) and on any non-super contributions over the $25,000 annual limit.

For these groups, there are options outside of super worth considering.

I will be hosting a webinar on Tuesday 9^th May at 11am to give advisers and their clients more detailed information about investment bonds – their uses, how they are structured and how they work in different situations in light of the superannuation changes.

Please feel free to join me – you can also Tweet your questions at me (@NeilRogan1 or #AskNeil), or shoot them through live and I’ll answer them during the session. I will be very happy to answer any questions you may have about the suitability of investment bonds for your clients in different circumstances.

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Summary of the changes most likely to affect SMSFs

Changes take effect from 1 July 2017

Transfer balance cap

A maximum of $1.6 million can be transferred to the tax-free retirement phase. Those with retirement phase balances of over $1.6 million will have 6 months to transfer the excess out of super or back into an accumulation fund.

Concessional super contribution cap reduced.

Concessional contributions to super are limited to $25,000 per annum.

Non-concessional contributions cap reduced and new criteria introduced

Annual non-concessional contributions must not exceed $100,000 (dropped from $180,000).

Lowering of the income threshold from $300,000 to $250,000 for 30% rather than 15% tax on contributions. This means that Australians with an income of $250,000 per annum or more will pay 30%, double the usual tax rate of 15% on contributions into super.

Transition to retirement pensions will lose their tax-free status

Earnings on fund assets supporting a transition to retirement pension will be taxed at the same 15% tax as accumulation funds.

The post Changes to superannuation are almost here – don’t keep your head in the sand appeared first on AdviserVoice.

Here, Neil Rogan, Head of Investment Bonds for Centuria, looks at the benefits of using investment bonds to invest your client’s savings for educational expenses.

Wouldn’t it be great for your clients to know they had the school fees covered? One less big ticket item to worry about, and the confidence of knowing that they are able to make the best educational choice for their child or grandchild, without being unduly influenced by the price tag.

Education, and particularly private education, can be monumentally expensive. For most Australians, unless they win the lottery, education is ‘pay as you go’…and a constant cost pressure. As returns on savings attract tax, any attempt to save consistently for a long-term goal can feel like one step forward and two steps backward. Super is great from a tax perspective, but it’s not much help if your clients’ children will be starting school before the client is 65!

The true cost of education is surprisingly high

Costs vary enormously depending on the choices made, but you can be sure of one thing – it’s all expensive. According to recent research, parents of a child born today, who has a fully Government funded (public) education, including university, will spend in the order of $200,000 on education. A fully private education, on the other hand, comes in at nearly $700,000. And a mix of the two will be somewhere in between^[1]. It’s a lot of money to save, and if your client has more than one child or grandchild to fund, it can be daunting.

It’s important to be realistic

Education is more than simply tuition; the desire of parents to give children a well-rounded education adds to the total cost. An increasing number of parents are concerned that an intense focus on academic excellence in some schools is overshadowing the social and emotional growth of their children, and that children should be more engaged in activities other than academic studies^[2].

This means extra-curricular activities, which more and more parents see as crucial to a well-rounded education, but which also incur additional costs. While a realistic estimate of educational costs should include extras such as books, uniforms and stationery, it should also include the costs of extra-curricular activities such as sport, music and dance. Add to that the increasing number of overseas opportunities for kids today – sporting competitions, art tours, music camps and student exchanges – it can add up quickly.

The solution? Encourage your clients to start investing their savings as soon as possible, and choose a tax-effective structure.

Investment bonds – one of the most tax-effective investment structures outside of super.

An investment bond is an insurance policy, with a life insured and a beneficiary; in reality however, it operates like a tax-paid managed fund. And as with a managed fund, you can make recommendations to your client from a broad range of underlying investment portfolios. These typically range from growth oriented assets, such as equities, to defensive assets such as fixed interest. They can also include other asset classes and combinations of assets.

An investment bond has a number of advantages:

Tax effectiveness

An investment bond is tax-effective because returns from the investment portfolio are taxed at the company tax rate (currently 30%) within the bond structure, and are then re-invested. They are not distributed as income. This means your client does not need to include them in their annual tax return, and as illustrated in Figure one, if the bond is held for 10 years, all funds are distributed with personally tax-free.

If a withdrawal is made within the first ten years:

• The earnings are included in the investor’s personal tax return and

a 30% tax credit applies (as shown in Figure one, a smaller proportion is included for withdrawals in the ninth and tenth year)

• Only the net after-tax income received from an investment bond is taxable
• If the holder of the investment bond dies during the 10-year period, neither the beneficiary nor the estate needs to pay any further tax on proceeds.

In addition, depending on the investments in the underlying portfolio, dividend imputation credits and other credits may apply, making the effective tax rate less than the prevailing company tax rate. This compares very favourably with the top marginal tax rate of up to 49%.

Capital gains tax simplicity

As earnings are automatically reinvested in the bond, reinvestment dates do not need to be tracked for capital gains tax purposes. In addition, the bond holder can switch between investment options without triggering a capital gains tax liability.

Affordability

There is no limit on how much is invested in an investment bond. A client can start with as little as $500 and make additional contributions every year, up to 125% of the previous year’s contribution.

Flexibility

Investment bonds are most tax-effective when held for 10 years or more, but the funds can be withdrawn at any time as required. If the money saved is not in fact needed for education, it can be used for any other purpose.

Ownership and transfer

If a client is saving for a child’s education, the investment can be held in the child’s name, as long as he or she is over the age of 10. This means however, that child will gain full control to decide how to spend the money once he or she reaches age 16.

The preferred option in most cases is to hold the bond in the name of the parent or grandparent. This avoids penalty tax rates for children under 18 if they make withdrawals in the first 10 years, the adult stays in control, and the bond can be started for a child younger than age 10.

This is an option preferred by many grandparents putting money aside for a grandchild’s education. If ownership is transferred to the child, the original start date is retained for tax purposes.

Case study

Andrea and Peter recently celebrated the birth of their first child, a son they named Noah. One of first things Andrea did was to put Noah’s name down at the same secondary school Peter had attended; a school he’d loved and that was local to them. Noah’s parent had been reading about the increased cost of education and realised they needed to start saving as early as possible to ensure that the cost of this secondary education wasn’t crippling – particularly as they intended on providing Noah with a sibling or two.

Andrea and Peter, both of whom are on a high personal marginal tax rate, chose to start an investment bond savings plan with $1,000. His grandparents and parents together add $100 each month to the investment bond.

Each year, the regular contribution amount is increased by 25%. Assuming the investment returns 4% income (70% franked) and 3% growth, by the eleventh year, when Noah has nearly completed primary school, there would be more than $49,000, tax paid, to put toward the cost of his education.

* Provided for illustrative example only based on the basic income and growth assumptions described above. This illustrative example does not purport to represent the actual return possible in any of Centuria Investment Bonds. An investment is subject to risk, the degree of which depends on the assets in which the bond invests.

In conclusion

Investing for a child or grandchild’s education may one of the most important challenges in your clients’ financial life. The key to their success will be keeping three things in mind.

• Firstly, investing regularly over the medium to long term can translate into a growing nest egg, and clients benefit from the power of compounding returns.
• Secondly, investment bonds provide many special features for investors seeking a simple tax effective alternative with the objective of building an asset over time.
• Finally, investment bonds are highly attractive investment vehicles for the investment of your client’s savings for the long-term, particularly for those on a higher marginal tax rate.

Remind your clients to start early, invest savings regularly and be realistic about the costs of education. That way, by using an investment bond, they can provide their kids, or grandkids, the education they want without breaking the bank.

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[1] Figures based on the the Australian Scholarship Group (ASG) calculator
[2] According to the ASG Parents Report Card 2016

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