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The Experts

Neil Rogan
+ About Neil Rogan

Neil Rogan is the General Manager – Investment Bonds Division at Centuria, overseeing a range of investment bonds designed to meet a range of personal and financial goals. The range of tax effective unit-linked investment options offered within Centuria’s investment bonds covers balanced to aggressive risk profiles.

Neil has more than 20 years’ experience in the financial services industry having held a number of senior roles at AMP Ltd, including Head of Marketing and Campaigns, Head of Product Marketing and leading the change for the introduction of MySuper in 2013.

Estate planning options curtailed by super changes

Tuesday, April 11, 2017

By Neil Rogan

Advisers and investors are urged to look carefully at options outside of super.

Following changes to superannuation legislated in 2016, the Treasurer has been vocal in his view that superannuation should be ‘fit for purpose’. He also acknowledged that ‘a prosperous Australia needs a well-targeted superannuation system that supports and encourages all Australians to save’, but specified that its purpose is to ‘provide income in retirement to substitute or supplement the Age Pension’.

The Treasurer has also stated that superannuation is not meant to be for ‘unlimited wealth accumulation and estate planning’, nor for ‘intergenerational wealth transfer’. And the recent changes make this very clear.

Neil Rogan, General Manager, Investment Bonds Division at Centuria explains why changes to super mean that now may be an appropriate time to educate yourself about tax-effective investment strategies outside of super, and to look clearly at your options when it comes to estate planning.

Now is a good time to take a closer look at how best to structure investments, including super, when it comes to estate planning.

But first, below is a short summary of the changes most likely to have the biggest impact.

Summary of the major changes

  • 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.
  • Lower cap on concessional (pre-tax) contributions from $30,000 to $25,000 from 1 July 2017. Higher concessional caps for the over 50s will not exist after July 2017.
  • Cut in annual non-concessional (after-tax) contributions cap to $100,000. This is a concession to community and industry anger when the original announcement was the introduction of a lifetime non-concessional (after-tax) contributions cap of $500,000 to take effect immediately. The lifetime $500,000 has now been scrapped and replaced with an annual $100,000 non-concessional cap to take effect from 1 July 2017. However, it is only possible to make non-concessional contributions if your super balance is less than $1.6 million.
  • Lowering of the income threshold from $300,000 to $250,000 for 30% rather than 15% tax on contributions which means that any Australian with an income of $250,000 pa or more will pay 30%, double the usual tax rate of 15%, on contributions into super.
  • Removal of the tax-exemption for transition to retirement pensions (TRIP) means super fund earnings supporting a transition to retirement pension will no longer be tax-exempt.

So what’s the result?

It may now be time to review your estate planning arrangements, particularly where the bulk of your wealth is held in superannuation assets.

Regardless of the recent changes, and the fact that it is inaccessible until the age of 55 or 65 depending on your age, super is still one of the most tax-effective means of saving.

However, the annual cap provisions for non-concessional contributions, along with the transfer balance cap of $1.6 million into retirement phase accounts, mean that for higher net worth individuals in particular, the ability to contribute larger lump sums into super in the future has been seriously curtailed.

Tax-effective investment strategies outside of super do exist

Returns from most investments outside of super are taxed at the investor’s marginal tax rate, but there are some structures which are tax-advantaged. Investment bonds, for example, are flexible and simple investment structures that have stood the test of time.

An investment bond is an insurance policy, with a life insured and a nominated beneficiary. 

However, in practice it operates like a tax-paid managed fund. Investors choose from a range of underlying investment portfolios, depending on their objectives, and returns are derived from these portfolios.

Tax is paid on returns within the bond structure at the company rate of 30%, and are not distributed to the investor, but rather re-invested in the bond. For this reason, investors do not need to declare income from the bond or include it in their tax return. Better still, if they remain invested in the bond for 10 years, all returns are distributed tax free. There is no limit to the amount which can be invested in an investment bond, and additional contributions can be made every year, up to 125% of the previous year’s contribution.

Unlike super, contributions can be made at any time or age, and are not restricted by retirement or work tests.

If funds in the bond remain invested for 10 years, no tax is payable, but investment bonds are more flexible than super, in that funds can be accessed at any time. However, depending on when the withdrawal is made, investors may need to pay some tax.  

Simple, structured and protected estate planning

Because investment bonds are insurance policies, with a beneficiary and a life insured, if the life insured dies (and in some other specified cases), proceeds from the bond are distributed to the nominated beneficiary entirely tax-free. In addition, the distribution bypasses the estate and is paid directly to the beneficiary. In other words, no tax is paid either by the beneficiary or by the estate.

Distributions from an investment bond to any beneficiary, whether they are financially dependent or not, cannot be challenged in the same way that bequests in a will can, and are also protected from creditors in the event of bankruptcy. An investment bond may be a structure to distribute funds to family members or others, outside of super and outside of a will. Even if the life insured does not die, prompting the distribution of tax-free funds.

The bottom line is that in light of the super changes (and uncertainty regarding future changes), Australians who have relied on super as their primary estate planning tool, with the intention of accumulating wealth to pass on to other generations, means that it could be the right time to look at alternative options. Investment bonds are one such option, and given their very real benefits in terms of both investing for the future and estate planning, they are definitely worth a considered look.

Disclaimer: Centuria Life is an issuer of Investment Bonds.

This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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Tax effective investing: Investment bonds

Friday, November 04, 2016

By Neil Rogan

In the May 2016 Federal Budget, the Government revealed a number of changes to superannuation. Among them was a $500,000 lifetime cap on non-concessional contributions (back dated to 2007) a $1.6 million cap on the amount of super that can be transferred into a tax-free retirement account, a reduction in annual concessional contribution limits, and an increase in the super contributions tax above a certain income.

The reason given for the changes is that too many well-off Australians had been using generous tax breaks in super for the purpose of accumulating more wealth than they needed for retirement, often with a view to transferring it to the next generation, at the expense of the average tax payer.

In September, following staunch opposition to some of the changes, and in particular the ‘retrospective’ aspect of the non-concessional cap limit, the Treasurer announced that the cap would be scrapped. In its place, an annual $100,000 cap will be imposed – to take effect from July 2017.

Whatever your view of the changes, or the underlying philosophy driving them, the fact is that the Federal Government has superannuation firmly in its sights. And if the recent changes, and subsequent changes make anything clear, it’s that the system as it stands is not set in stone.

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

Whether or not you’re likely to be significantly affected by the changes, investors seeking certainty and flexibility in a tax-effective environment may consider alternatives outside of super.

There are various options which can help minimise or defer tax, including creating a private company to hold investments, or forming a family trust, but one of the most tax-effective, flexible and cost-effective options is an investment bond.

What is an investment bond?

Investment bonds are technically life-insurance policies with a nominated life insured, and a beneficiary. In investment terms, they operate like a tax-paid managed fund. Investors choose from a range of investment options, depending on their goals. These range from growth portfolios (higher risk) which typically include more equities, to defensive portfolios (lower risk) which usually invest in cash and/or fixed interest.

An investment bond is tax-paid, because the earnings from the underlying investment portfolio are taxed at the company rate of 30% within the bond structure. Investors do not receive distributions, (these are re-invested), and therefore do not need to declare the earnings from the bond in their personal tax return.

In the case of investment portfolios which contain equities, the tax rate may be further reduced by any franking credits associated the equities in the portfolio.

Additional contributions to the investment bond can be made each year – up to 125% of the previous year’s contribution.

Unlike super, investment bonds are flexible. Funds can be withdrawn at any time, but if funds are left in the investment bond structure for 10 years, the entire proceeds of the bond (original investment, additional contributions and earnings) are entirely tax free. The investor does not need to include them in their tax return, and they can be distributed as a lump sum, or as a tax-free income over time.

And because an investment bond is in fact an insurance policy, with a life insured (this can be the same person as the bond owner), on the death of the life insured, the beneficiary of the bond will receive all proceeds of the bond tax free, regardless of how long the bond has been held.

The proceeds fall outside of the bond owner’s estate, and pass directly to the beneficiary. This makes investment bonds ideal estate planning tools, or an effective way for grandparents to give money directly to grandchildren, for example, without passing through their own children.

Protect yourself from potentially damaging super changes

It’s clear that the Federal Government is far from finished when it comes to tinkering with the superannuation system. With an aging population and increasing pressure on the aged-pension and government social security payments, the issue of how much the individual should pay, and how much the government can afford to contribute, is far from resolved. The pressure to limit tax concessions in super, in order to shore up tax receipts now, is getting stronger. Super is unlikely to escape further changes.

So is super still a tax-effective structure for long term saving? Yes, definitely. In fact, it remains the most tax-effective long-term investment structure for most Australians.  However, investors seeking more flexibility, more certainty, or for those affected by the changes and unable to contribute more to super, considering alternatives like investment bonds makes good financial sense.

Disclaimer: Centuria Life is an issuer of Investment Bonds.

This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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