Investment Bonds Insights June 2017
Welcome to our June 2017 edition of Investment Bond Insights
Your 1 pre July super checklist: here’s five important questions to help you prepare
The end of the financial year can be a hectic time, just in sorting out your taxes and planning for the year ahead. This 1st July also marks the beginning of the biggest changes to superannuation in over a decade, so taking the time to think about how they affect you now could make a significant difference to your financial situation in the future. Here, Neil Rogan, General Manager of the Investment Bonds Division for Centuria, provides a checklist for the most important considerations for investors preparing for the 1st July super changes.
Changes to super announced in the 2016 Federal Budget are just weeks away.
In fact, the majority will come into effect on 1st July. These changes won’t impact everyone, but they will limit the amount of the concessional and non-concessional contributions you can make into your super. And if you are a high-income earner, you are in for a tax increase.
This is important to think about even if you will not be affected right now; if you are still contributing to super, chances are the changes may affect you in the future. That’s why it makes sense to be aware of the changes and how they could impact you in the future.
Having said that, there’s no question that super remains one of the most tax-effective ways to save for retirement for most Australians, but given the fundamental nature of the recent changes, and the possibility of more in the future, thinking about tax-effective savings strategies outside of super may be worth considering.
So what should you be asking yourself, and your financial adviser?
1. Do you have more than $1.6 million in your pension account? If you do, what will you do with the excess?
From 1 July, can no longer have more than $1.6 million in the tax-free pension phase of super. If you currently have more than $1.6 million, you will be required to transfer the excess either back into the accumulation phase or out of super entirely.
In the accumulation phase, returns will be taxed at 15%. If you are considering transferring out of the super system, one option worth considering may be an investment bond.
An investment bond operates like a tax-paid managed fund, with a range of investment options available. Income earned is re-invested into the bond, not distributed to you. If you hold the bond for 10 years, all proceeds, capital and investment returns are distributed to you tax-free.
There is no limit on the amount you can invest, and you can make additional contributions each year if you wish, up to 125% of the previous year’s contribution.
You can access your money at any time, prior to the 10-year tax-free threshold, but depending on the timing you may forgo some of the tax benefits.
2. Will the new concessional contribution limit affect you?
Concessional contributions are being cut from $30,000 – $35,000 per annum to $25,000 per annum for everyone.
If you have been contributing more than $25,000 in concessional contributions to your super, you will no longer be able to do so. As an alternative, you may want to look at a savings plan outside of super with the excess contributions you can no longer contribute. An investment bond may be a good way of saving as you can contribute regularly, returns are tax-paid within the bond structure and re-invested, and fully tax free after 10 years. You can also access your savings at any time if you need to.
3. Will the new non-concessional limit affect you?
From 1 July, you will only be able to make up to $100,000 per annum in non-concessional contributions, down from $180,000 per annum.
There will be a maximum bring-forward cap of $300,000 and if you already have $1.6 million in super, you will not be able to make any more non-concessional contributions at all.
If you cannot contribute as much as you would like to your super, investing outside of super in a tax-effective structure, like an investment bond, maybe an option. There are no limits to your initial investment, and you can make additional contributions each year. After 10 years there is no personal tax on withdrawals.
4. Do you need to have an estate planning conversation with your adviser?
Estate planning is an essential part of any financial plan, the consequences of making the wrong decisions can be very serious. Quite apart from potentially paying more tax than you need to, bequests that come through an estate can be delayed if there are complications, and the legal fees associated with managing the estate can also be high.
An investment bond may be an option in this regard. It is simple and offers greater control over death benefits than other investment options. This is because an investment bond does not form part of your estate – and death benefits associated with the bond can be directed to a nominated beneficiary. In addition, proceeds are paid to the beneficiary entirely tax-free, regardless of how long the bond has been held.
An investment bond may also offer protection from creditors in the case of bankruptcy.
5. What should you do next?
Taking the time to review your financial situation is always a good idea, but it’s particularly important now, particularly if the changes to super disrupt your long term retirement planning strategy significantly. It’s hard to imagine that there won’t be more changes to super in the future, or that any future changes will make the system more, rather than less generous.
The bottom line is that it makes sense to look at other strategies outside of super. And investment bonds are a great place to start. They provide simplicity, transparency and tax-effectiveness, and can also be used very effectively for estate planning purposes.
See our latest net returns as at 31 July 2016 below:
|1 year||3 years||5 years|
|Centuria Growth Bond Fund||6.10%||7.12%||8.45%|
|Centuria Balanced Fund||7.93%||5.64%||7.90%|
|Centuria High Growth Fund||5.84%||6.16%||9.80%|
|Centuria Australian Shares Fund||7.76%||7.28%||10.98%|
|Centuria Implemented Portfolios Dynamic Asset Allocation Bond||5.72%|
|Centuria Cash Plus Fund||12.10%|
* Performance of this tax paid bond is measured as a 12 month rolling return from 31 May 2016 to 31 May 2017, after taxes and fees. Past performance is not indicative of future performance.
For more information on how Centuria Investment Bonds can form a core component of your client solutions please call 1300 50 50 50 or email firstname.lastname@example.org. Alternatively please call your Business Development Manager.
VIC/TAS/SA – Jason Lien (03) 9616 6547
NSW/QLD – Allison Macfarlane (02) 8923 8920
We would be delighted to assist you and your clients prepare for the post 1 July 2017 environment.
Investment Bond Division