Richard Atkinson

Investment Bonds have benefits and features which are worthwhile evaluating as a way to supplement superannuation or even as an alternative tax-effective vehicle.

Tax effective structure of Investment Bonds

Investment Bonds are tax-paid investments similar to superannuation. Throughout a Bond’s investment term the Investment Bond pays tax annually on behalf of the investor at a maximum tax rate of 30%.
This can provide valuable tax rate “arbitrage” benefits due to the difference between an investor’s higher ongoing personal marginal tax rate and the Investment Bond’s effective (lower) tax rate.

In the case of Austock Life’s investment portfolio options, each has its own tax rate which is nominally stated as 30%. From year to year and depending on the asset class invested in, the level of imputation and foreign tax credits and tax provisions, the actual effective tax rate can be significantly less.

The table below shows estimated, long-term tax rate ranges for Austock Life’s different investment portfolio asset classes.

Table: long-term tax rate ranges

Accessibility

Investment Bonds provide unrestricted access to benefits with no preservation age, retirement or purpose test required.

Proceeds received from partial or full withdrawals made after 10 years are considered a tax-free receipt and not subject to personal income tax or capital gains tax. Where an investor fully or partially withdraws from an Investment Bond within the first 10 years of investment, the earnings component will generally attract personal tax.

The apportioned earnings included in the withdrawal will be assessable as follows.

Table: apportioned earnings

A 30% tax offset entitlement is available to reduce the amount of tax (if any) payable by the investor.

Investment Bonds also have the added flexibility of being able to be transferred to another person or entity with the original investment date carrying over for the purpose of the 10-year period.

No limits or caps on the investment amount, unlike superannuation

Unlike superannuation, there are no work-test or aged based restrictions on investing, so that those over age 65 years can continue to make investment contributions. Restrictions such as non-concessional contribution caps and concessional contribution caps that limit or penalise excess contributions do not apply.

There are no caps on the amount that can be invested in an Investment Bond. You can progressively increase an Investment Bond’s tax-effectiveness by making ongoing contributions under the taxation law applicable to Investment Bonds, known as the 125% Rule.

Under the 125% Rule, the Investment Bond’s valuable taxation status is maintained when making ongoing additional contributions, provided these do not exceed 125% of the level of contributions made in the immediately preceding 12 month period.

The attraction of the 125% add-on feature is that you can make ever increasing levels of additional contributions. This can be done at any time during and even beyond the Investment Bond’s initial 10-year period.

Investment options

You can construct the Investment Bond’s investment mix by using one or multiple investment portfolios from a range of passively (index) and actively managed funds covering all asset classes including cash, shares, fixed interest, and property.

The Investment Bond’s switching facility provides the flexibility and tax-freedom to change the investment portfolio mix at any time to suit changing circumstances or market conditions, without personal tax or capital gains tax consequences.

Estate planning

Under superannuation legislation, death benefits must be made payable to a “dependant” as provided for under the legislation. Beneficiaries that an investor nominates must be proven to be a dependant of the investor, otherwise death benefits may not be paid to the person, and instead paid to the estate and be subject to tax.

Beneficiaries nominated under an Investment Bond are not required to be a dependant. As such, there is no restriction on who can be nominated as a beneficiary, which may include a person, company, charity or trust.

There is also no requirement to nominate or re-nominate a beneficiary every three years in order to make the nomination binding (unlike many superannuation funds). The death benefit from an Investment Bond is paid tax-free to the beneficiary, irrespective of who the beneficiary is…no death benefit tax is payable.

Tax reporting

Similar to superannuation, using an Investment Bond removes the ongoing accounting, tax management, regulatory and legal costs for an investor. Investment Bond investors are not required to report on or pay PAYG instalment tax for the term of their investment.

In addition, investors are not required to maintain tax records or make annual tax declarations (unless a withdrawal is made within the 10 year period).

There is also no requirement to provide a tax file number or maintain detailed cost base, capital gains tax and imputation credit records that are typically required with other investment structures. In addition, no withholding tax is required to be paid on earnings (including for foreign resident investors).

By Richard Atkinson, Head of IFA Product and Relationships

The post How an Investment Bond can help supplement superannuation appeared first on AdviserVoice.

Richard Atkinson

The removal of anti-detriment payments, announced in the Federal Budget and effective from 1 July 2017, will have a profound effect on non-dependant beneficiaries receiving death benefit payments from un-taxed elements of superannuation funds. This is now commonly known as “Australia’s Death-Tax by Stealth”.

Prior to 1 July 2017, where trustees allow it, it is possible to re-claim the ‘lump-sum’ tax of 17% paid on these funds by claiming anti-detriment payments. This will not be possible after 1 July 2017.

An alternative strategy is the use of an Investment Bond facility to make a ‘Binding Nomination’. This can be implemented if the superannuation fund member is approaching the end of his or her life (perhaps due to illness) with a life expectancy of say, 3 to 5 years.

The member withdraws his or her super, including the ‘untaxed’ element, and invests into an Investment Bond. He or she then makes Binding Nominations to their ‘non-dependant’ beneficiaries (they do not have to be family) with the intention that upon passing, all benefits are paid to the recipient ‘tax-free’.

Whilst there is less tax being paid in the superannuation fund than within the Investment Bond, provided the member does not live beyond expectations, the amount of tax-paid within the Bond should not exceed the ‘lump-sum’ tax they would otherwise have to pay if received as a superannuation death benefit.

Below is a ‘live-case’ study from an actual investor using an Austock Life Investment Bond.

Scenario:

• Richard is 82 and in failing health.
• He has $500,000 in an Account Based Pension with a taxable component of $250,000.
• He has no dependants.
• Funds will go to non-dependants on his death.
• Based on the current components, Death Benefit tax of $42,500 will apply.

Strategy – Establish an Insurance Bond in Richard’s name

• Redeem super – tax free as over 60. Make binding nominations.
• On Richard’s death, the Bond matures and is paid tax-free to beneficiaries regardless of the Bond year.
• Tax paid within Bond. Approx. 5 year breakeven point* when compared with funds remaining in super + death tax.

* Based on $500,000 Investment Bond investment in the Conservative Fund assuming gross annual return of 5.84% and internal portfolio tax rate of 27.5%.

Benefits:

• Save $42,500 in tax.
• Non-contestable.
• Nominated beneficiaries can be anyone.

By Richard Atkinson, Head of IFA Product and Relationships

The post “Australia’s Death-Tax by Stealth” – can it be managed? appeared first on AdviserVoice.

Richard Atkinson

Using an Investment Bond, financial advisers can put in place arrangements that are not only separate from their client’s Will, but can facilitate the Bond’s proceeds passing to intended beneficiaries well after (e.g. many years) the date of the investor’s death.

A Bond can be structured to achieve intergenerational wealth transfers. This can be achieved by using the multiple Life Insured (or Other Lives Insured) feature, which can allow a Bond’s legal ownership to continue after the Bond Owner’s death, in the hands of a trustee, executor or estate administrator.

The Bond’s investment maturity can be matched to specific planning objectives at its intended investment term (e.g. 30 years) for example, to meet a long-dated endowment or an intergenerational wealth transfer.

Alternatively, Investment Bond nominations, like superannuation nominations, can operate to directly distribute investment proceeds (tax-free) upon the investor’s death and bypass the Will and legal estate.

In contrast, a Bond’s nomination is neither subject to trustee discretions, nor does it entail natural person or “dependant” restrictions as to the range of possible beneficiaries. Additionally, once a Bond nomination has been made, it does not have to be periodically refreshed or reconfirmed in future years.

By Richard Atkinson, Head of IFA Product and Relationships

The post Smart estate planning must include alternatives to the Will appeared first on AdviserVoice.

Richard Atkinson

Retirees are rediscovering insurance bonds as a way to supplement their retirement income from within a tax paid environment and still maintain access to their funds, says Richard Atkinson, AUSTOCK Life.

Insurance bonds are emerging as a solution for nervous retirees who want an income stream solution that provides a guaranteed income as well as control over where their money is invested and full access to their funds.

Financial planners and wealth management firms are combining the fixed income guarantee of annuities or Account Based Pensions (ABP) with the flexibility of insurance bonds.

Case Study: Retiree maximising retirement income with two income streams

Sixty-seven year old retiree Max Conroy (not his real name) has inherited $650,000 from his late mother’s estate. He has an ABP in place which provides him with a modest income. He wants to use this inheritance to set up an income stream.

Max is not enamoured with current bank interest rates or those offered by annuities. As he is of good health he believes he will need to invest for at least 20 years and wants flexibility built into his investment choice. Also, he didn’t want the money tied up in case a need arose.

Buying an annuity meant that Max could not choose how the fund manager invested his money and he would not benefit from any outperformance in the underlying investments. But he had peace of mind knowing that he had an income, albeit fixed, for his chosen term.

However when discussing his plans with friends in a similar situation, he realised that accessibility to his capital would have restrictions. He could not take money out of the annuity as a lump sum and, where he could, might get less than he invested.

“My friends had children a bit older than mine and were planning to help them out with a deposit for a house. I realised if I put all my money into an annuity that should I need to make any withdrawals for similar reasons, it could be quite expensive,” Max said.
A disadvantage with guaranteed products like an annuity is the lack of flexibility because your money is tied up. If you need a hip replacement or want to pay for a child’s wedding, too bad.

Instead, with the help of his financial planner, Max invested in an Austock Imputation (insurance) bond to provide both the flexibility and accessibility he wanted. He was able to establish a flexible monthly payment from the bond and take advantage of the 30% tax offset to reduce his overall tax position. He is able to stop, start or vary payments at will and can add unused income back into the bond. This compliments his ABP well and he can move the portfolio from ‘balanced’ to ‘conservative’ as he needs to match market conditions.

“The insurance bond has been a forgotten investment product which is starting to re-emerge among planners. Money is slowly moving back in to this highly flexible tax structure” said Richard Atkinson.
Imputation bonds definitely have some strong features in the form of uncapped contributions, flexibility of investment options, the benefit of a tax offset for withdrawals in its early years (this can be re-set via the 125% rule, if advantageous) and tax free after ten years. Importantly for Max, he would have access to money regardless of his age.

“Having lived through the worst sharemarket downturn in a generation and seeing the latest volatility, it is understandable that retirees living longer than their forebears are increasingly seeking products that offer a guaranteed steady income stream,” observed Mr Atkinson. “But it is possible to have the best of both worlds using a strategy that combines both an insurance bond with an annuity or an ABP.”

A more conservative approach to Max’s case, given that some retirees really like Capital Guaranteed investment, might be to invest $250,000 in an insurance bond and purchase a term annuity for $400,000.

The imputation bond, split between say, the term deposit fund (40 per cent) and the Perpetual Balanced Growth fund (60 per cent)*, based on the historical five-year returns (5.1% per annum after fees and tax), this portfolio would allow Max $20,000 a year for 20 years with some balance still remaining.

The term annuity, meanwhile, would pay a guaranteed $20,000 a year for 20 years. The annual payment stream representing 2.5% per annum after fees.

Interestingly, both the imputation bond and annuity pay out the same amount each year despite the wide differences in the initial investments.

However there are several underlying differences. After 20 years, Max is left with a balance of $164,553 in the annuity. In contrast, the bond has about $20,000 left in it despite an initial investment of $250,000 because the bond’s underlying investments were in conservative/balanced assets.

Max effectively has the best of both worlds:

• regular income of $40,000 with half from the annuity and the rest from the bond
• gives the option of helping out children if he chooses
• can allow some effective estate planning with bond should he suffer an early death.

The post Insurance bonds on the comeback trail as income streams appeared first on AdviserVoice.

Richard Atkinson

Grandparents are increasingly utilising insurance bonds to leave bequests to their grandchildren that are beyond will disputes.

Case study – Grandparents passing assets direct to grandchildren, bypassing their wills:

Seventy-year old Geoff slumped into the armchair and look resignedly at the ceiling. “No one ever said being a parent would be easy. But I thought being a grandparent would be a breeze,” he said in exasperation to his wife, Janice.

“What’s the problem this time, as if I didn’t know?” she asked.

The couple’s “problem” revolved around their son Clark who had two children, Sue and John. Since Clark had hooked up with his partner Carol 15 years ago, he had been a constant source of worry for his parents. Always a rebel, he had not become responsible with the onset of parenthood, and many was the time that Geoff and Janice suddenly found Sue and John on their doorstep when their parents disappeared for days or months at a time.

This time Clark had been dismissed from his latest job over allegations of stealing from his employer. Fortunately it would not mean withdrawing Sue and John from their private school, as Geoff and Janice paid those fees. But the couple was reviewing their Wills and wanted to ensure that Sue and John received a decent bequest to start their own lives.

Initially they considered a testamentary trust under their Wills but finding acceptable trustees – their son and daughter-in-law were out of the question – and the cost and administration involved discouraged them from going down that road.

As testamentary trusts often operate for long periods, it is essential to appoint willing and honest trustees. These trustees must be competent and knowledgeable about investments, tax matters and compliance.

Also legal challenges can arise due to disgruntled beneficiaries and others who are left out of the Will.

“Leaving Clark and his wife out, or with different entitlements, is almost certain to create problems for the grandkids,” said Janice. “I want the money placed out of the reach of the Will and beyond challenge.”
As an alternative, grandparents can use modern insurance bonds, also known as imputation bonds, to plan ahead about how, when and to whom their estate’s wealth (or part of it) will be distributed. Some modern imputation bonds have special design features for passing money cleanly to grandchildren that:

• Allow for multiple beneficiaries with different entitlements;
• Can be tailored for meeting small and large bequests;
• Are low cost; and
• Operate in a low maintenance “set and forget”, tax-effective environment.

At a meeting with their financial adviser, Geoff and Janice also discovered that insurance bonds are increasingly being used for making protected bequests.

“As insurance bond nominations can be set up as ‘excluded assets’ from legal estates, bequests made in this fashion can be put beyond Will disputes,” explained Wayne, their financial adviser.

Another result of using insurance bond nominations for non-estate bequests is that these can be made in secret because these types of inheritances are not subject to probate procedures (and costs) and hence, are not brought within the public domain.

“That’s a relief,” said Geoff. “It leaves it up to Sue and John whether or not they tell their parents about it.”

But the couple wanted to make sure that if the grandchildren received the proceeds from the bond while still at home and under the influence of their parents, that the money would not be frittered away.

After discussing their hopes with Wayne, Geoff and Janice set up an insurance bond for Sue and John as part of their estate planning.

Richard Atkinson, Head of IFA Product and Relationships, Austock Life Limited

The post The secret bond option for grandparents appeared first on AdviserVoice.

Richard Atkinson

An often overlooked investment can give parents in blended families certainty that their nominated beneficiaries will receive their bequest without challenges from disgruntled family members.

An insurance on bond is a non-estate asset outside the control of the deceased’s will and not subject to the usual delays associated with probate.

The imputation bond owner can nominate beneficiaries within the account which may be different to their current family arrangement. And where a parent is leaving money to a child form another relationship, they can also, as bond owner, make withdrawals at any time for any purpose for that child.

Case Study:

Steve puts aside money for daughter from first marriage

When Steve re-married his second wife Sarah he was concerned with making sure his ten-year old daughter Kate from his first marriage got a good start in life.

Daughter Kate is living with his former partner while Steve and Sarah have two young children. The couple use mutual wills to provide for each other and for their children from both marriages. But Steve is not sure if this arrangement will reflect his concerns about providing for Kate. His first marriage was a turbulent time and Steve’s relationship with his former partner, Alice, is not an easy one.

As he wasn’t sure of the best option, he visited his financial planner Tom for some advice. So-called ‘blended’ families bring with them financial challenges that are not apparent in traditional families. Indeed Steve’s situation is not unique. One in five Australian couples who marry will have a partner who has been married before.

While Steve has a Will, it could be challenged. However the rise of blended families and second marriages, as well as old-fashioned sibling rivalry, still results in challenges to estates that can produce outcomes which do not reflect the wishes of those who have bequeathed the funds.

Steve could have a testamentary trust created under his Will, but even this arrangement has its shortcomings. As Tom pointed out a testamentary trust not only finding willing and honest trustees who are competent, knowledgeable about investments, tax matters and compliance, but can be impracticable for smaller dollar bequests. It also requires annual administration and tax reporting costs and can be inflexible and costly to unwind.

A frequently overlooked estate planning option is an imputation bond. Also known as insurance bonds or friendly society bonds, they are a low-cost flexible structure that can achieve highly effective estate planning solutions.
An imputation bond is a tax-paid investment, in much the same vein as superannuation, but without the hassles of the contribution caps and preservation restrictions that apply to super.

Additionally, investment bonds pay tax on the investor’s behalf at a rate that is capped at the corporate rate, currently 30 per cent. This rate is often significantly less due to the use of allowable tax credits and benefits, such as franking credits.
Importantly, unlike superannuation where benefits are preserved, investors can still make withdrawals at any time for any purpose. That feature is attractive for Steve as it provides the flexibility to draw against it for Kate’s education and maintenance. Finally, once investors have owned the bond for ten years, they can withdraw all or part of the proceeds free from any further tax assessment.

For Steve, the most attractive feature of the imputation bond for estate planning purposes is in the area of beneficiary nomination. He can nominate beneficiaries within the account – in this case only Kate – to receive the proceeds tax free upon his death, irrespective of how long the investment has been in place. Significantly, the insurance bond is considered to sit outside the control of the deceased’s will, being a non-estate asset, and is not subject to the usual delays associated with probate.

Finally, the distribution of proceeds to beneficiaries nominated is very difficult – if not impossible – to successfully challenge.

Kate needs only produce a copy of her father’s death certificate to gain access to the funds within the bond.

But death is not the only way for Kate to access the funds. As the original bond owner, if Steve transfers the bond to her for nil consideration, he pays no personal tax or capital gains tax. This transfer happens with full preservation of the bond’s tax advantaged status, such as maintaining the original 10-year start date.

While using an investment bond is not necessarily the solution for all of a client’s estate planning needs, it can effectively transfer wealth between generations to reflect the client’s desired outcomes.

By Richard Atkinson, Head of IFA Product and Relationships, Austock Life Limited

The post Insurance bonds can avoid bequest trap appeared first on AdviserVoice.

Richard Atkinson

Investors who like the idea of investing in a vehicle that allows them to forget about their tax obligations every year, might find the concept of using insurance bonds as a “set and forget” investment quite appealing.

In the case of Imputation bonds, investors can set them up as “set and forget” investments.

During the bonds accumulation phase, no personal taxation or capital gain tax (CGT) liabilities apply. That means investors do not:

• need to keep personal taxation and CGT records,
• have to make annual tax declarations in their tax returns of any of the bond’s investment growth, and
• are not subject to Pay-As-You-Go (PAYG) tax instalment liabilities on the bond’s investment earnings.

Additionally, Imputation Bonds are exempt from Tax File Number notification requirements when investors establish the investment.

However Richard Atkinson of AUSTOCK Life, a leading specialist issuer of insurance bonds warns investors that; “Investors need to be aware that if they make withdrawals within a bond’s first 10 years, then personal tax might potentially apply.”

This could arise under the following scenarios:

• if they withdraw (in full or part) within the bond’s first eight years – they may attract personal tax on the “proportionate” value of the bond’s investment growth component; and
• that “proportionate value” is one-third exempt when a withdrawal is made in the bond’s ninth year, and is two- thirds exempt when a withdrawal is made in the tenth year.

Importantly, after 10 years, an investor’s personal tax deferral becomes permanent – they do not incur any personal tax or CGT whatsoever on an Imputation Bond’s investment growth.

Many refer to this as “set and forget” investing, it requires little effort and you don’t have to constantly manage your portfolios tax reporting.

The post A set and forget investment for investors appeared first on AdviserVoice.

Richard Atkinson

An insurance bond might help with meeting income-related thresholds for some government benefits. But Bond alone ownership cannot increase eligibility for the Age Pension.

When a person directly owns insurance bonds (including the AUSTOCK Imputation Bond), they are treated as “financial assets” and will count as an asset under the assets test and deemed to earn income under the income test.

Typically “deemed” income applies whereby Government prescribed deeming rates are multiplied by the value of an investment to determine its “deemed” income, instead of its “actual” income. This applies to most financial investments such as cash, term deposits and shares – and from January 2015 to account-based superannuation pensions.

As such, although an insurance bond may assist with not infringing income-related thresholds for some government benefits, Bond ownership alone cannot increase your eligibility for the age pension.

Imputation Bonds Held Inside Private Trusts

Where a financial investment is held within a private trust (such as a family or discretionary trust), it is the “actual” or ordinary income of the trust that is assessed under the income test.

Insurance bonds do not distribute income (or capital gains) and, when held within a “designated private trust”, are assessed by Centrelink and the Department for Veterans Affairs on an “actual” rather than “deemed” income basis. So although an insurance bond held within a trust continues to be assets-tested, it is income tested only if and when a withdrawal takes place.

Qualifying for Government Benefits and Rebates

During an insurance bond’s accumulation growth phase, its investment returns do not add to a person’s taxable income. As such, a bond investment can assist in controlling and lowering the level of taxable income during the accumulation years.

Therefore, an insurance bond can assist in not infringing income thresholds for various government welfare benefits. These could include the Commonwealth Seniors Health Card, HECS/HELP student loan repayment thresholds, Study Assistance, Parenting Allowances, Family Tax Payments (Part A and B) superannuation co-contributions, and qualifying for tax offsets, such as the Low Income Tax Offset and Senior Australians Tax Offset.

Home and Residential Aged Care Strategies

Eligibility for various Government income support payments, and also determination of the level of a person’s residential aged care fees and home care fees are subject to an income test and (with aged care fees) also an assets test.

Indeed, those planning or about to enter a residential aged care facility (and possibly restructuring their assets, including the sale of the family home) could be concerned about being adversely affected by either, or both of these tests. These tests could potentially:

• reduce their pension entitlement;
• increase their daily fee for residential aged care; or
• increase their cost for home care.

By holding some of their investments in an insurance bond in a designated private trust, may assist their situation by “quarantining” income from the income test, and bring about reduced care fees and improved pension entitlements.

By Richard Atkinson

The post Social security and pension treatment of insurance bonds appeared first on AdviserVoice.

Richard Atkinson

Speaking yesterday at AUSTOCK Life’s Masterclass in Sydney, Richard Atkinson, discussed adviser strategies to assist retired clients in getting or keeping a Seniors Health Card.

“The rules for deeming account based pensions get tougher from 1 January 2015 and advisers will have to restructure assets for clients who are in danger of losing or not qualifying for this health card.

“Changes to the assessment of the Health Card and other benefits mean that income tests are now included automatically,” said Richard Atkinson, AUSTOCK Life.

How can advisers assist clients close to qualifying for the Health Card?

“Simply, there is a need to take some assets and the income they produce out of the assessable pool of assets and reduce deemed income for these retirees at risk of losing benefits that they now depend on in retirement.

“It is possible that a modern insurance bond can assist in ensuring that a person does not infringe the income qualification thresholds for various Government rebates and welfare benefits such as the Commonwealth Seniors Health Card and Senior Australian tax offset.

“During the imputation bond’s accumulation growth phase, its investment returns do not add to a personal taxable income. Such bonds can be used to lower and better manage a person’s taxable income in its accumulation phase,” said Mr Atkinson.

The post “Dear client: Is your Seniors Health Card at risk?” appeared first on AdviserVoice.

AUSTOCK Life has calculated that people entering aged care facilities after 1 July will be up to $10,000 or worse off rather than entering such a facility in the current financial year.

“We took a view that with average assets of around $350,000 and not owning a home, an average person going into an aged care facility will be around $10,000 worse off over their stay in the facility,” said Richard Atkinson, AUSTOCK Life.

AUSTOCK Life prepared a simple case study to show how an average Australian pensioner going into aged care will be worse off after 1 July 2014.

The post Average Australian going into aged care will pay around $10,000 more appeared first on AdviserVoice.