I have been a big fan of investment bonds (also called insurance bonds), particularly as a way to save for children or grandchildren. But the Government’s decision to cap super balances and restrict super contributions means that they are now a realistic alternative for investors outside of super to accumulate long term wealth.
To this end, one of the four main investment bond issuers, Centuria Life, has executed a major product refresh. Under the name Centuria LifeGoals, the investment bond offers the choice of a very impressive set of investment managers, both active and index, a lower minimum investment size of just $500, and a streamlined fee structure.
Centuria Life is an APRA regulated life insurance company, part of the ASX listed Centuria Capital Group (ASX: CNI). Other issuers of investment bonds include AMP, CommInsure and IOOF.
Here’s our product road test.
“Tax paid” investment products
Investment bonds are “tax paid” investments. They invest in shares, property or fixed interest securities (depending on the investment option selected) and pay tax at 30% on the investment earnings, net of any allowable deductions and applicable tax offsets, such as franking credits. Because they are “tax paid”, investors don’t need to declare any investment earnings in their personal income tax returns.
Further, if held for 10 or more years, you don’t pay any tax on the monies when you redeem the bond (i.e. no capital gains tax).
They are issued by life insurance companies (hence why they are sometimes referred to as insurance bonds) and have a ‘life insurance” component. If the owner of the investment bond dies, the market value of the bond is paid to his/her nominated beneficiaries. Similar to a “binding death nomination” in super, this is paid directly to the beneficiaries, bypassing the often complicated and time consuming probate process.
As “tax paid” investments, investment bonds can be a great product if you want to save or invest for your child or grandchild. You won’t have to deal with the tax issues for minors (under 18s), which could see you personally liable for the tax on investment income if it is not clear that the investment is held on behalf of the minor, or alternatively, the minor paying tax at a penalty rate of tax. Under current tax law, investment income for minors above $416 per annum is taxed at 66% before reverting to 47% when it goes over $1,307. Further, you can assign the investment bond to your child or grandchild on him or her reaching a particular age, and if the bond has been held for more than 10 years, they won’t pay any tax when they cash it in.
Investment bonds can also be used to complement your superannuation. Under the new rules, you aren’t able to make personal (non-concessional contributions) once your total superannuation balance reaches $1.6m, and for balances between $1.4m and $1.6m, caps apply. So, investment bonds can be an alternative once your super is “full”. To be tax effective, you would need to have assessable income of at least $37,000 so that you are paying tax at a rate of 30% or more (at $37,000, the marginal tax rate goes to 34.5% including Medicare). There are also additional estate planning and access benefits (no tax for non-dependants, potentially accessible at any time).
One important feature of investment bonds is the ability to adopt a regular investment plan using the “125% rule”. This allows you to make up to 125% of the previous year’s contribution without resetting the 10-year period. For example, if you invested $10,000 in the first year, you could contribute (up to) $12,500 in the second year, and that would be available (with no tax to pay) at the same time as the first $10,000, in effectively 9 years’ time.
Centuria offers a menu of 22 investment options, each of which is managed by a specialist investment manager. There are cash and fixed interest funds, diversified balanced funds, diversified growth funds, Australian share funds, international share funds and property and infrastructure funds.
Interestingly, Centuria offers both actively managed and passively (index) managed options. For example, if you want the bond to invest in Australian shares, you could choose to have the monies managed in the Firetrail Australian High Conviction Fund, or Vanguard’s low cost Australian Shares Index Fund, or a combination of both (subject to a minimum of $500 per investment option).
In the international arena, managers include Magellan, T Rowe Price and Vanguard (their international shares index fund). Diversified balance funds are provided by Russell Investments, MLC and Vanguard.
Investors pay a management fee of 0.6% pa for all options except the Pendal Enhanced Cash Fund (where it is 0.5%), and then adds the investment manager’s fee. The latter depends on the Manager and the investment style, and varies from a low of 0.13% pa for Vanguard’s Australian Shares Index Fund to a high of 0.95% pa for Magellan’s Global Fund.
For the Pendal Enhanced Cash Fund, the total net management fee is 0.68%. For Vanguard’s Australian Shares Index Fund or International Shares Index Fund, it is 0.73%. Five of the investment options also potentially charge performance fees.
The minimum initial investment is $500, and you need a minimum of $500 per investment option. Additional contributions with a minimum of $500 can be made, or you can set up a regular monthly investment plan with as little as $100 per month.
Here’s the bottom line
This is a well-constructed, flexible investment bond product offering a strong range of investment managers, styles and asset classes. Pricing is competitive.
Important: 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 regard to your circumstances.