Wealth creation is a key priority for financial advisers and investors particularly post the GFC and as people are living for longer in retirement. The 2015 Intergenerational Report showed that a retiree at age 70 today can expect to live for another 17 years for a male and another 19 years for a female. Many people don’t account for the fact that their retirement savings need to potentially last to age 90 or beyond and along the way, many are faced with how best to minimise tax payments and options to transfer wealth to dependants.
Superannuation plays a significant role in retirement savings. However, there are a range of other wealth creation strategies that haven’t received the attention that superannuation has over the past decade, yet provide valuable options.
An investment bond also referred to as an insurance bond, can assist with wealth creation and when it comes to tax, this form of investment stands out from the crowd.
The tax-paid advantages
An investment bond is a ‘tax-paid’ investment where tax on investment earnings at up to the corporate tax rate is paid by the life insurance company. Investment earnings from the investment bond generally don’t have to be declared in the investor’s tax return, unless a withdrawal within the first 10 years of holding the policy[1] is made. Profits on additional contributions, which satisfy the 125% rule[2] don’t have to be invested for the full 10 years to acquire the tax-paid status.
Investors can withdraw part or all of their funds at any time. If they have already reached their super contribution caps, an investment bond may be an attractive alternative. Unlike super, there are no contribution caps to deal with, allowing investors to increase their investment in an investment bond at any time.
Flexibility is the way forward
Tax benefits aside, investment bonds can also be structured in a number of ways to solve estate-planning problems. An investor can nominate more than one beneficiary and specify the percentage each will receive. When a beneficiary is nominated, the proceeds will not be subject to challenges to the investor’s estate, as they will not form part of the estate assets (except in NSW).
One unique feature of the award winning[3] CommInsure Investment Growth Bond (IGB) is that it offers a Death Benefit Guarantee which provides certainty on the minimum amount that will be paid on the death of the last surviving life insured, which can be particularly important during times of market uncertainty. Death benefits paid are tax-free in the hands of the recipients. With super, death benefits paid to non-dependants risk paying death benefits tax on the taxable component of 17% or up to 32% if the death benefits are sourced in part or whole from insurance proceeds.
A CommInsure IGB can also provide wealth transfer benefits and can be set up as a child’s advancement policy, and ownership can automatically be transferred to the child at a specified age, without capital gain tax consequences.
Additionally the CommInsure IGB has a simple and transparent fee structure with one management fee ranging from 0.85% to 1.50% p.a. depending on the investment option selected and no stamp duty is applied for initial and ongoing investments.
Case study – Strategies using a CommInsure IGB
Heather is 72 and a self-funded retiree, with six grandchildren aged between 8 and 18. Heather has three adult children and is concerned that there may be conflicts over her estate when she dies. She would like to set up an inheritance for each grandchild that’s safe from any family disagreements over her will. Heather can set up Child Advancement Policies for her grandchildren under the age of 16, by investing in a CommInsure Investment Growth Bond.
Under this structure, each grandchild would be a life insured and Heather would be the policy owner. Heather would nominate a vesting age (between the ages of 10 and 25), at which time the grandchild would automatically assume full ownership and control of the policy.
Until then, Heather would retain full control of the investment, including the ability to make withdrawals and switches. If Heather was to die before the vesting age, she could leave instructions in her will for the trustee of her estate to be the policy holder of the investment, until the grandchildren reached vesting age.
An allocation to an investment bond can also be used as a strategy for maximising pension payments calculated under Centrelink’s income test and can assist with enabling an investor to receive the full age pension where held in a trust.
A CommInsure IGB structure can also be complementary to an investor’s retirement funding strategy. Investors can choose from nine Lonsec rated[4] investment options and for those looking for security, four of these options have capital guarantees. The nature of the guarantees differs across the Cash, Global Fixed Interest, Conservative and Diversified investment options.
There is no doubt that there are a range of benefits for people who are seeking wealth creation strategies, tax efficiencies, flexibility and an alternative to superannuation investment. When considering wealth creation it sometimes pays to think of the alternatives.
Investing in a CommInsure IGB
Anyone aged at least 10 years or older can invest in a CommInsure IGB with a minimum investment of $1,000. For more information, please visit comminsureadviser.com.au/igb
The CommInsure Investment Growth Bond is issued by The Colonial Mutual Life Assurance Society Limited ABN 12 004 021 809 AFSL 235035 (CMLA, trading as CommInsure). Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information. CommInsure is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.
[1] For more information, please refer to the CommInsure Investment Growth Bond Product Disclosure Statement (PDS).
[2] CommInsure (IGB) has a 125% rule meaning that every year a client can contribute up to 125% of the previous year’s contribution to continue to satisfy the 10 year rule.
[3] The CommInsure IGB has won the Association of Financial Advisers (AFA)/Plan for Life (PFL) Investment Bond of the Year Award for 7 years running.
[4] Lonsec rating, February 2016: NC Cash – Recommended; NC International Shares – Investment Grade; NC Australian Shares – Investment Grade; NC Global Fixed Interest – Recommended; NC Global Property – Investment Grade; NC Conservative, NC Diversified, NC Balanced, NC Growth – Investment Grade.
