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Navigating new super caps when planning your estate

Glenn Freeman  |  12 Dec 2016Text size  Decrease  Increase  |  
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With the significant changes to superannuation caps proposed in Budget 2016-17 having now passed the Senate, alternative tax-paid structures may see a resurgence among those nearing the threshold.


Investment bonds are among some of the alternative approaches to tax-effective retirement income and estate planning strategies, with the reform package having passed the House of Representatives, and two out of the three bills granted royal assent.

As long-term investment products, investment bonds combine many of the features of managed funds with the legal and tax structure of a life insurance policy.

Having been available in Australia since the early 1980s, at their height there was somewhere in the order of $40 billion invested in these products, according to Richard Atkinson, head of IFA product and relationships, Austock.

"They're not impacted by changes to super caps, and could be quite a good retail alternative to using super, once the changes come in, because there are no caps.

"They offer a far more flexible structure in terms of access, too,"  Atkinson says, with assets not subject to the strict preservation conditions of super assets.

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Under the terms of these products, funds are pooled with money from other investors, and a portion of this total pool is invested according to the investment options chosen by each party.

Withdrawals carry no personal tax liability when held for 10 years or more, and taxable withdrawals inside this period receive a 30 per cent tax rebate, as earnings are tax paid by the investment bond issuer.

They also generally offer a menu of investment options, sometimes run by the bond issuer, but more often fund structures managed by professional investment managers--such as Perpetual, Vanguard or AMP Capital.

Life products

Investment bonds--also commonly known as insurance bonds--are issued under the Life Insurance Act 1995. As such, there is a requirement to nominate a life to be insured and a beneficiary.

Atkinson highlights this as another potential advantage, in being able to ensure money passes to a third-party--particularly in situations such as blended families.

"A life insurance death benefit…passes outside of the will and probate, directly to the beneficiary, therefore it can't be challenged. For example, in blended families, when you want to make sure [children from a first marriage et cetera] get what you want them to get, rather than have the risk that a newer family member can challenge it.

"They can be set up to benefit a child long after the death of the original owner," he says.

Austock provides this option through a specific sub-structure called a Child Builder Bond, where the ownership can vest in a nominated child somewhere between the age of 20-25 years of age, "like a pseudo-testamentary trust," Atkinson says.

Fee structure

There are two-tiers to the costs you're subject to when holding an investment bond. In addition to a management expense ratio charged by the underlying fund manager, the issuer charges their own fee on top--something like a platform fee.

According to Atkinson, Austock charges 9 basis points, "so for an investment bond invested in Australian Shares, you're looking at about 1.1 per cent all up."

A number of Australian banks and financial institutions also offer investment bonds, including Australian Unity.

“While superannuation remains an attractive way to plan for retirement, these new caps mean more people will now need to explore options outside of superannuation, and sooner than they thought," says Matt Walsh, general manager of life and super, Australian Unity.

He describes them as a structure that has 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 super," Walsh says.

"They can be drawn on with a deductible amount plus a tax offset, in accordance with the individual’s marginal tax rate."

Such withdrawals can be as large or small as required, and the withdrawal comprises  both a capital and earnings component. The capital component is not subject to tax.

While investment bonds are accessible to self-directed investors, both Walsh and Atkinson highlight the importance of obtaining professional advice when considering using such products.

More from Morningstar

What you need to know about the pension transfer balance cap

Helping SMSF trustees negotiate super complexities


Glenn Freeman is Morningstar's senior editor.

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