Matt Walsh

The popularity of investment bonds has surged since the start of the year, with Australian Unity’s investment bond business, Lifeplan, passing through the $2 billion in funds under management (FUM), advice and administration mark.

“The on-going uncertainty surrounding superannuation, particularly since the May Federal Budget, has contributed to a boost in the popularity of investment bonds and they are increasingly seen as a tax effective superannuation alternative,” said Mr. Matt Walsh, General Manager Life and Super for Australian Unity, and head of Australian Unity’s investment bond business, Lifeplan.

“Along with the implementation of major technology upgrades, including multiplatform functionality, a new direct investor portal and website, and XPlan and adviser portal upgrades, Lifeplan has also implemented a number of product enhancements. This includes an expanded investment menu which includes eight new options, based on adviser feedback, which has proven popular.”

Mr Walsh added that the relevance of investment bonds has become more obvious to financial planners and investors who are suspicious of the constant tinkering of the superannuation system and who are looking for a tax effective compliment to their existing super products.”

“Investors are realising that investment bonds are similar to superannuation funds in that earnings are internally taxed within the fund – in this case 30 percent – and also that theyoffer the same asset class diversification as managed funds, but with the added benefit of a tax advantaged structure that managed funds can’t match.

“Investment bond earnings are tax paid at a maximum of 30 percent, and investors do not have any tax liability while their money remains invested in the investment bond.”

“When held for 10 years or more withdrawals from the investment bond are tax free and taxable withdrawals before the tenth year carry a 30 percent tax rebate.”

“As is the case with managed funds, investments held within an investment bond receive full franking credits, which are reflected in the effective rate of tax paid by the investment bond – and thus in the unit price – rather than being redistributed.”

Mr Walsh said investment bonds are more relevant today than perhaps in any other time since their development.

“Investors have been drawn to investment bonds as they have the additional advantage over superannuation. Unlike superannuation, contributions are not capped within the investment bond structure, which creates opportunity when considering long-term savings goals, and they do not carry restrictions on withdrawals nor any concept such as preservation age.

“For investors looking for a tax effective, long term investment option, with investment in a wide range of asset classes available, without the worries of legislative change or limitations of future access to funds, investment bonds fit the bill.”

Matt Walsh

While the changes to superannuation in last week’s Federal Budget caught many by surprise, there are well-established options to help people achieve a tax effective retirement income, says Matt Walsh, head of Lifeplan.

“The government-mandated superannuation system means that many people had stopped considering alternatives other than super for saving for their retirement. The changes in the Federal Budget will reverse this situation for many.

“Aside from those few people who had already reached their superannuation caps, most people simply had no need to look at alternative strategies – super was everything.

“Last week’s changes mean that more people will now need to explore options outside of superannuation, and sooner than they thought, but this shouldn’t be a cause for panic and confusion.

“A well-trodden path for higher net worth and higher income investors in the past who had capped out their superannuation limits is investment bonds, but these aren’t the exclusive domain of the very wealthy – they are easily accessible to everyone,” he said.

Mr Walsh said that investment bonds are a particularly good tax-advantaged alternative to superannuation, with earnings tax paid at a maximum of 30 per cent.

Other advantages include:

• they do not carry the restriction on withdrawals prior to preservation age
• they don’t have contribution limits
• as earnings are tax paid at a maximum of 30 per cent, investors do not have a tax liability while the funds remain invested inside the investment bond
• several providers offer a wide range of investment choice and very contemporary features
• when held for the long term – 10 years or more – withdrawals from the investment bond carry nil personal tax liability, and taxable withdrawals prior to the 10th year receive a 30 per cent tax rebate as earnings are tax paid by the investment bond issuer
• once the investment bond policy has reached its 10 year anniversary, withdrawals are non-assessable for income tax purposes – there is no preservation age or condition of release

Mr Walsh said that in many ways, investment bonds can be thought of as just like super, with tax rates somewhere between super and high marginal tax rates, but without all the complexity and constraints around super.

“Investment bonds are a particularly attractive option for those who aim to retire prior to reaching preservation age, or who aim to decrease their working hours while keeping a steady income flow available. In effect, it creates a true Transition to Retirement strategy outside of superannuation.
“In this situation an investment bond can be drawn on with a “deductible amount” plus a tax offset in accordance with the individual’s marginal tax rate.

“This means if an investor chose to work 20 hours less a week, they could substitute the lost income by drawing on an investment bond. Such withdrawals can be as large or small as the investor requires, and the withdrawal comprises of both a capital and earnings component. The capital component is not subject to tax.

“For this reason many investors who had reached the previous super caps have already been using investment bonds as a means to transition into retirement without increasing their tax burden.  Where the bond is held in excess of 10 years, any withdrawal amount will not be subject to further personal tax, a strategy that may allow an investor to retire early and maintain an income without affecting their taxation liability.

“Financial advisers are likely to receive many questions from clients worried about how to best save for their retirement if they aren’t able to put enough into superannuation, and investment bonds are a useful approach to discuss with them,” Mr Walsh said.

Greg Bird

Parents want choice, flexibility, and an assurance they won’t be locked into a pre-determined future when looking at options for saving for their children’s education, but not all options offer these benefits, says Greg Bird, national business development manager at Lifeplan Funds Management.

“When it comes to education planning, parents want to understand how to provide a good education for their children, as well as what funding choices are available.

“Importantly however, they then want to make sure that whatever funding choice they select will not lock them into a pre-determined future.

“One of the problems with some education savings options is that they can only be used for a very narrow range of expenses.

“With education costs outpacing wage increases in Australia, parents need to be confident they are making the right choice when it comes to planning for their children’s future needs.

“Year in, year out, education costs continue to outstrip the pace of inflation, and the past 12 months has been no exception. While inflation, as measured by the CPI, clocked in at 1.5 per cent, education costs clocked in at 5.5 per cent*,

“This is an area of increasing concern to Australian families,” Mr Bird said.

There are a number of strategies to assist with meeting the future cost of children’s education, but most of them also have significant limitations.

“The simplest and most tax effective strategy is repayment of non-deductible debt, generally the home mortgage, so that this money can be redrawn for education expenses later. However this strategy requires extreme discipline and runs the risk of the funds being withdrawn to pay for lifestyle assets,” Mr Bird says.

“Another option is direct investment in the name of the child, but this also has its limitations. In most cases, the tax free threshold for children’s income is just $416 per year, and they are hit with a penalty tax of up to 66% on earnings once that threshold has been breached. Even a simple high-earning savings account could breach this threshold.”

A trust structure may also be considered as a funding mechanism for education costs, with the most common type of trust being discretionary family trusts.

“A family trust is a vehicle to accumulate investments with the earnings or profits distributed in the most tax-effective way. Essentially, a family trust allows people to exercise discretion when distributing funds to beneficiaries, however this may still fall under the confines of the minor’s penalty tax of 66%.”

Alternatively superannuation funds can be considered as a solution, as long as the investor has reached preservation age and has satisfied conditions of release.

“This window of opportunity will really only be of benefit to a very limited number of parents or grandparents. The other concern with using a superannuation based funding strategy is the regular changes made to superannuation legislation, creating a scenario of what works this year may not the following year.”

The approach that perhaps offers the most flexibility and the broadest range of features for education savings are investment bonds, which can vary in design, features and operation, Mr Bird says.

“Education funds that are classified as Scholarship Plans under Australian tax law have unique tax features not available with other savings and investment products. These funds are based upon an investment bond structure and can be used for a broad range of educational related expenditure at any age or level of education.

“The concern of some investors when entering into an education savings plan is that they will be locked into a very narrow range of allowable education expenditure. Not so for investment bonds.
“With a contemporary education fund it is possible to claim on a broad range of expenses as opposed to just tuition fees. These can include costs such as uniforms, books, materials, private tuition, student fees, residential boarding costs, rent and other accommodation expenses.

“Separate plans do not need to be set up for different needs – instead a single plan can be used to provide a lifetime of education, in a tax advantaged way.

“The investment income of an education fund is taxed up to a maximum rate of 30%. While the earnings accrue within the fund there is no assessable income to declare for either the investor or student. Only when funds are withdrawn will it affect assessable income and may be taxed – and even then the tax may be minimised or even not incurred at all.

“When a claim is made for education expenses from investment earnings, the education fund can obtain a refund of tax on the education expenses being claimed. This produces an education tax benefit which is passed on to the nominated student as part of the education claim and can be worth an additional $30 for every $70 of earnings withdrawn.

“The additional benefit with using an investment bond structure is you can get the best of both worlds; if your child doesn’t go on to tertiary education, you can utilise the money for anything you like.

However, Mr Bird also recommends thorough research, as there are a number of ‘copy-cat’ funds that are not true education funds at all.

“An investment bond education strategy is not a silver bullet that will solve every funding need; basic financial planning principles apply. It is still very much a case of doing the math and crunching the numbers to arrive at the right outcome, using the right strategy, and the right structure.”

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* Based on latest available figures from Q3 2014 to Q3 2015: http://www.abs.gov.au/AUSSTATS/abs@.nsf/mf/6401.0?opendocument#from-banner=LN

Mr Francis will be based in Perth and will report to Lifeplan’s head of distribution, Mr Derek Emery.

The move follows the recent appointment of Mr Ron Grima as Lifeplan business development manager for Queensland and Northern Territory.

With five years experience in the financial services industry, Mr Francis joins Lifeplan from the Commonwealth Bank in Perth, where he was a business financial planner.

Mr Emery said the appointment of Mr Francis is timely, as the business expands into Western Australia.

“Ryan’s past experience as a financial planner with strong technical skills and client relationship management more than prepare him to work with the Perth team as we look to grow our footprint in Western Australia,” Mr Emery says.

“His appointment will increase the span of our business development and service capabilities as Lifeplan prepares itself for its next stage of growth.”

Mr Francis holds a bachelor of accounting and finance from Edith Cowan University.

In this role he will be responsible for maintaining and developing relationships with advisers and licensees in the Queensland and Northern Territory financial services markets.

Mr Grima has over 25 years’ financial services experience and joins Lifeplan from Equity Trustees, where he was a key account manager.

Prior to joining Equity Trustees, he was national account manager with AXA. He has also worked with Invesco Australia as state manager, and Perpetual as senior account executive, as well as holding business development roles at Lend Lease Financial Planning and Royal & Sun Alliance.

Mr Emery said that Mr Grima’s appointment was a welcome addition to the Lifeplan BDM team.

“With 27 years experience in business development and account management and over 20 years experience in leadership and people management, Ron’s experience and skillset will be of value to the team as they continue to maximise Lifeplan’s presence in the Queensland market.

“Ron’s reputation among his colleagues and past clients is that of an exceptional senior manager, dedicated to client service and the delivery of corporate objectives.”

Mr Grima holds a bachelor of business from the Queensland University of Technology.

Matt Walsh

Australian families should brace themselves for more ‘user pays’ in our education system. Regardless of whether the current Federal Government achieves its stated education reforms, costs will inevitably rise in the future, according to Matt Walsh, head of Lifeplan.

“There’s an old saying that ‘nothing can be said to be certain, except death and taxes’ but in my view, this could be extended to include the certainty of increasing education costs,” Mr Walsh said.

“Education costs have grown by an average of 5.32 percent annually over the past 10 years, whereas CPI has averaged 2.67 percent, and this trend shows no sign of abating.[1]

“In addition, the Government announced in the recent Federal Budget that from 2018, total school funding would be indexed to the Consumer Price Index.  This points to an increasing shortfall in funding in future years.

“Inevitably, parents will be expected to make up this shortfall by paying for more and more of the cost of their child’s education, whether they are privately or publicly educated.

“Likewise, the Government’s proposed university fee deregulation reforms would mean that the cost of tertiary education will almost certainly increase significantly for Australian families in the future.

“While these reforms are currently being stalled by the Senate, it seems likely that at some point in the future there will be significant changes to the way the education system works.  It is possible that Australian families could to find themselves in a similar situation to that of the United States, where student loans are the biggest form of consumer debt after a mortgage, having surpassed credit card debt in 2012,” Mr Walsh said.[2]

Recent data from the Federal Reserve Bank of New York shows not only is student debt the biggest form of consumer debt after home mortgages, but it’s also the worst performing.  Arrears levels for student loans are rising, a particularly concerning trend.

“The US experience teaches us a sobering lesson on how paying for education can become a serious burden for families.  Saving for a college education has long been standard practice in the US, and increasingly Australian families will need to consider doing the same for university,” Mr Walsh said.

“Such savings shouldn’t just be limited to tertiary education.  Having a savings plan to offset the costs of primary and high school can also make a big difference to families.

“It means that at the start of a school year, large expenses such as uniforms, sports or musical equipment, text books, laptop computers and other stationery don’t have to be met out of the day-to-day budget – something that can be especially challenging just after Christmas.

“Instead, a dedicated savings fund can be built up to cover these costs, and other family members such as grandparents encouraged to contribute during the year, rather than buy toys or clothes that will be quickly outgrown.”

An education savings plan with a friendly society such as the Lifeplan Education Investment Fund has the added benefit of favourable tax treatment. This means that when earnings are withdrawn to pay for an education expense, the proportionate tax that has been paid by the manager is refunded.

“A good education is a more valuable present to give children, and finding ways to make this easier will benefit all Australian families,” Mr Walsh said.
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[1] http://www.abs.gov.au/ausstats/abs@.nsf/mf/6401.0 March 2015

<[2] http://www.forbes.com/sites/specialfeatures/2013/08/07/how-the-college-debt-is-crippling-students-parents-and-the-economy/

Matt Walsh

The age, gender and wealth level of clients can make a significant difference to which services and assistance they value most from their financial adviser, according to the latest Lifeplan ICFS Financial Advice Satisfaction Index*.

The most recent survey, undertaken in October, shows that younger clients – those aged under 30 – are focused on wealth-building strategies, and rank the selection of fund managers and managed funds, as well as advice on regulations, most highly. On the other hand, those aged between 45 and 60, and over 60, are more interested in fees and charges, managing financial risk, and getting advice on retirement plans.

Matt Walsh, head of Lifeplan, said that these findings underline the importance for financial advisers of knowing their client and tailoring their approaches to suit.

“It’s perhaps surprising that younger clients – regardless of how much they have to invest – don’t rank details on fees and charges, or ability to negotiate these, highly in their list of priorities.

“Instead, they are far more interested in choosing the right fund manager or managed fund.

“It is in fact older investors who are focussed on fees and charges – even those with relatively substantial levels of wealth.”

Mr Walsh said that the survey also found that female clients are more risk-adverse than their male counterparts.

“Women ranked “management of financial risks” as their number 1 priority, while men placed it third.  Interestingly, male clients ranked “details on fees and charges” first, and “selecting fund managers” second, suggesting men are more focused on returns and rewards.

“For female clients, details on fees and charges came second, and “advice on tax strategies” ranked third, indicating a more cautious and risk-adverse approach to finances.

“Regardless of gender, those with less to invest – that is, less than $50,000 – said that tax strategies were their number one priority.

“This feedback could be very useful to financial advisers in helping clients prioritise their goals and build a strategy,” Mr Walsh said.

Overall, there was a slight decrease in the level of satisfaction that investors have with their financial advisers since the last survey in April 2014 (down 0.27 percent), coinciding with a sharp decline in equity markets.

“Traditionally, client satisfaction has closely followed the performance of the share market, and this survey is no exception,” said Mr Walsh.

“However it is heartening that the decrease was very slight, compared to a significant dip in the S&P/ASX 200, suggesting that clients are less affected by market performance than in the past.

“It seems that financial advisers are doing a good job in showing clients that they do more than just provide investment advice and assistance, and that the services they offer are independent of market and economic conditions.

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* The survey of 407 investors who use financial advisers was undertaken in September by the University of Adelaide’s International Centre for Financial Services (ICFS) for Lifeplan, and sought feedback about the performance, trust and reliability, and technical ability of their financial adviser.

Paul Bugg

Lifeplan Funds Management has appointed Mr Paul Bugg to the position of business development manager for Victoria and Tasmania. The appointment follows the promotion in October of Mr Greg Bird to the newly created role of national business development manager.

Mr Bugg has more than 25 years’ experience in the financial planning industry, most recently as practice development manager with Macquarie Group. Prior to this he was a practice development consultant for BT Financial Group, and was a financial services manager for Commonwealth Financial Planning. Mr Bugg was also a financial planner with Commonwealth Financial planning for 13 years. He holds a diploma of financial planning.

Mr Derek Emery, head of specialised product sales, Lifeplan Funds Management, says Mr Bugg’s appointment fills an important role in the business following the promotion of Mr Greg Bird, and underlines the importance of Lifeplan’s adviser relationships in the southern states.

“Paul is a senior appointment and he brings with him a wealth of knowledge and understanding of the financial services industry. His broad range of experience spans strategy and program development, as well as business mentoring and coaching to assist advisers to develop their skills and capacity,” Mr Emery says.

The appointment comes at a key time for the company, as Lifeplan sees increased demand from financial advisers for investments bonds.

“Paul’s own experience as a financial planner will be invaluable in further building Lifeplan’s relationships with financial advisers in Victoria and Tasmania. His success as both a financial planning practitioner and a financial planning manager make him an excellent fit with the business as it prepares for strong adviser demand in 2015,” Mr Emery says.

Educating children is becoming an increasingly expensive business, and year on year the costs consistently outstrip inflation. Unfortunately on the education front, families educating their children are falling behind.

“More and more it would appear that grandparents are stepping in to fill the education savings gap,” Mr Walsh says.

“Nearly one quarter (over 23%) of Lifeplan Funds Management’s education policies are commenced by investors age 60 or over.

“The needs of retirees wanting to fund their grandchildren’s education are twofold. Typically, these grandparents are seeking the ability to retain control and, if needed, access the investment for their own use should an unexpected situation arise.  However, they are also concerned with ensuring they are not paying any unnecessary personal tax and protecting their entitlements, such as the Commonwealth Senior Health Card.

“Education funds, such as those on offer from Lifeplan Funds Management, are an attractive option, as it ticks these boxes for the grandparents and provides benefits for the grandchildren,” Mr Walsh says.

The Lifeplan Education Investment Fund is a “scholarship plan” in accordance with the Income Tax Assessment Act 1997.  This entitles Lifeplan to obtain a tax benefit, which is passed on to the investor, worth up to $30 for every $70 of earnings used to pay education expenses.

Other features of this type of investment include the ability to choose to withdraw funds from contributions and investment earnings, and no annual tax obligations for the investor or the nominated student, while the investment remains in the Fund.

Mr Walsh cites the example of John and Jennifer, grandparents to the newly born Max. They want to provide education support of $10,000 each year of secondary education and for up to four years of tertiary – a total of 10 years.

If John and Jennifer invest $40,000 in the Lifeplan Education Investment Fund, and can assume annual investment returns net of fees and taxes of around 5 per cent. The chart below shows the investment outcome at the end of the chosen period.

“The combination of the capital, the tax paid earnings and the education tax benefit provide the desired outcome, and a balance remains at the end of the term,” Mr Walsh says.“Over the period of investment full access is available to the balance and in need, John and Jennifer are able to withdraw funds for non-education purposes.

“Based on their specific circumstances, no personal tax liability will be incurred on annual investment earnings.  In addition, they are not required to include any investment return for ongoing access to entitlements such as the Commonwealth Senior Health Card.

“Provided their grandchild Max is not in receipt of any other investment income, he will not pay any tax on the education withdrawals.”

When Max’s education has ceased, John and Jennifer have a number of choices regarding any remaining investment balance.

They can:

• Leave the investment for any other future education Max may undertake.
• Retain for their own use.
• Cash out the balance (although they will not be eligible to receive the education tax benefit) and in the example, no personal tax would be payable.
• Transfer the ownership of the investment to Max for any ongoing tertiary studies.  There are no tax implications to either John and Jennifer or Max for doing this; however, stamp duty may apply in some states.
• Change the nominated student beneficiary from Max to another grandchild.

“John and Jennifer are also able to nominate a plan guardian to provide greater certainty about who will look after the education fund should they die or become intellectually disabled.

“Additionally, beneficiaries can be nominated who would automatically receive any account balance should Max die after the death of John and Jennifer,” Mr Walsh concludes.

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[1] http://www.abs.gov.au/ausstats/abs@.nsf/mf/6401.0

Mr Bird has 27 years experience in banking and financial planning, and was most recently business development manager, Victoria / Tasmania, with Lifeplan Funds Management. Prior to this he was advice quality manger with Colonial First State and was also a senior financial planner with Commonwealth Financial Planning for 11 years.  Mr Bird holds a diploma of Financial Planning.

Mr Derek Emery, head of specialised product sales, Lifeplan Funds Management, says the growth within the team is a reflection of the re-emergence of interest from financial planning groups and advisers in the use of investment bonds as they strive for quality of advice outcomes for their clients

“For many advisers, this has been a forgotten tax structure until recently, and for others it is a brand new opportunity opening up alternative solutions for clients.

“Greg’s appointment increases the experience and depth of the leadership team within Lifeplan Funds Management and provides additional technical and sales support to the BDM team.

“Greg’s years of experience as a financial planner, in conjunction with his BDM approach, have resulted in first class feedback from planners, financial planning group leaders, and peers.

“Greg has been a proven performer within the sales team over the past few years and achieved industry recognition in 2014 as the National BDM of the Year,” Mr Emery says.

Mr Bird will continue to work with key relationships within the Victorian market that have been established over recent years, as recruitment for a Victorian BDM takes place.