Utilising Investment Bonds to maximise your age pension entitlements post 1 January 2017

8 December 2016

Publication: Adviser Voice
Sydney, 7 December 2016

CPD: Utilising Investment Bonds to maximise your age pension entitlements post 1 January 2017

Overview
From 1 January 2017, there are changes to the assets test taper rates and thresholds; this means many couples and individuals could lose part or all of their age pension entitlements. Some of the existing strategies to reduce assets and increase age pension entitlements may no longer be appropriate, with many clients looking for alternatives.

Traditional assets test reduction strategies may need to be reviewed including:

Gifting
A maximum of $10,000 per annum or $30,000 over 5 years. Gifting $10,000 can increase age pension entitlements by a maximum of $30 per fortnight or $780 per annum. However, it would then take almost 13 years of the Age Pension increase to recoup the $10,000 gifted away.

Funeral Bonds
The purchase of a funeral bond can currently exempt up to $12,500 of assets from the assets test. This could increase age pension entitlements by a maximum of $37.50 per fortnight or $975 per annum, and would take the investor almost 13 years of Age Pension to pay for the cost of the $12,500 Funeral Bond. However, in this instance, the money is not given away, rather it’s applied towards expected future expenditure.

Upgrading the Principal Residence
Upgrading the principal residence could increase the Age Pension by up to $78 per annum for every $1,000 spent. However, the value of this investment cannot be accessed until the principal residence is sold, with no certainty of the upgrade cost being realised in future value.

Other asset test minimisation strategies may also need to be reviewed:

Superannuation Contributions to a spouse under age pension age
Superannuation is exempt from the Centrelink Assets Test and Income Test for clients under Age Pension Age.

Lifetime Annuities
Lifetime annuities can provide an assets test benefit where the assessable asset value progressively declines, taking into account the relevant deductible amount (purchase price/life expectancy). The decline is usually smaller the younger the client is, and greater where the client is older.

Lifetime annuities – death benefit and voluntary withdrawal
Death benefits are guaranteed, but voluntary withdrawal values (other than periodic annuities, and where allowed) are determined by interest rate movements.

Limitations of Lifetime Annuities – 68 year old female and 78 year old male
In the case of a 68 year old female investing $100,000 into a lifetime annuity shows an assets test benefit of $133.43 per annum.

Year  Annual payment for social security purposes  Income counted for social security purposes   Annual deductible amount  Asset value for Social Security Purposes
1 $5,000.04  $0.00 $5,133.47 $100,000

Source: Challenger annuity quote 4/11/2016.

 

The below quote for a 78 year old male shows an asset test benefit of $4,224.95 per annum on $100,000 investment.

Year  Annual payment for social security purposes  Income counted for social security purposes   Annual deductible amount  Asset value for Social Security Purposes
1 $6,000  $0.00  $10,224.95 $100,000

Source: Challenger annuity quote 4/11/2016.

 

Joint investment in an Investment Bond – manages wealth transfer and age pension entitlements

Investing jointly in an investment bond
Investing assets in joint names in an investment bond triggers deprivation (gifting) on the portion of the asset that is divided with another person. For example, $600,000 invested in joint names with one child can trigger deprivation on $290,000. $600,000 invested in joint names with two children will trigger deprivation on $390,000. (Children will need to be at least 10 years of age to be an owner or co-owner of a bond.)

After five years from the start date of the investment bond, the deprived amount is no longer assessed for Centrelink purposes and in the example above, the age pension entitlement could increase by up to $23,400 per annum and $31,200 per annum respectively.

Deprivation is triggered on the value of the assets as at the date of investment in this instance, as that is when part of a person’s assets is being divested. Any growth of the deprived asset portion is ignored from Centrelink calculations – but is subject to deeming (under the income test), for only the duration of the 5-year deprivation period.

So, if seeking to maintain some control of an investment – and if joint ownership were effected sufficiently in advance of the time a person expects to reach an age where he/she qualifies for an age pension, this kind of forward planning may have no downside – and only future upside.

Detailed benefits of the strategy:

Control and intergenerational wealth transfer:
Investing in an investment bond in joint names with family members/beneficiaries enables the family to make joint decisions about how funds can be invested for the benefit of the family.

Ease of administration
The investment bond is a tax paid investment structure and does not distribute any income or capital gains, there is no tax administration requirements from the owners of the investment bond.

Liquidity
Funds from the investment bond are accessible at any time and can be utilised via a regular withdrawal plan or lump sum; it can be used to supplement lifestyle expenditure or major lump sum expenses like an Aged Care RAD.

Benefits of joint ownership for wealth transfer
Joint ownership of the investment bond means that even if one of the joint owners were to pass away, ownership of the investment bond would pass onto the surviving owners.

If the owner of the investment bond was also the life insured, the investment bond proceeds would be paid out tax free to the nominated beneficiaries.

Other benefits
Ownership can be changed without triggering a tax liability. Assets are protected, joint ownership means all joint owners are required to agree to any changes to the investment bond. The bond and its proceeds are also protected from creditors in the event of personal bankruptcy.

Disclaimer: All information in this document is simplified and viewed from a general perspective. It is also based on a broad understanding of current rules and guidelines at the time of producing this document. It does not represent ‘financial product advice’ as defined by the Corporations Act 2001 (as amended by the Financial Services Reform Act 2001), and no specific product is recommended. Appropriate and independent professional advice should be obtained by individuals before making any decisions based on the contents of this document. This document has been issued by Centuria Life Limited ABN 79 087 649 054, AFSL 230867 (Centuria) and contains general information about Centuria and its related bodies corporate that is current as at 5 December 2016. This document is not a recommendation or personal advice in relation to Centuria or any product or service offered by Centuria and does not take into account the investment objectives, financial situation or needs of any particular person. Applications for financial products referred to in this presentation can only be made via application forms contained within the respective product disclosure statement. Prospective investors should obtain and read a copy of the PDS relating to each product before making a decision to invest. Centuria and its associates will receive fees in relation to an investment in its Investment Bonds as disclosed in the PDS. Investment in each of Centuria’s investment bonds is subject to risk including possible delays in payment or loss of income and principal invested. With the exception of its Capital Guaranteed products, Centuria does not guarantee the performance of any of its investment bonds. The document has been prepared from information believed to be accurate, however, no representation or warranty is made as to the accuracy or adequacy of any information contained in the document.