Speaking to the Nest Egg podcast team, the general manager of Centuria's investment bonds division, Neil Rogan said bonds are a tried and tested structure, and in a world of near-constant superannuation reforms, investment bonds are making a comeback.
He also spoke with the Nest Egg podcast team about:
1. Using investment bonds to fund education;
2. How investment bonds fit into a goals-based investment strategy; and
3. When, and how, bonds may be a more suitable investment than superannuation.
Thanks, Neil, for sharing your insights with the Nest Egg podcast team!
You can stay up to date with what Neil and Centuria are up to here.
David: Good day and welcome to Nestegg podcast. David here. Joined today again with Lucy. Lucy, welcome back.
Lucy: Thank you for having me.
David: No worries. And also as well, the man himself, the General Manager for the Investment Bond division at Centuria Life, Mr. Neil Rogan. Neil, welcome to the show.
Neil: Thank you David. Thank you Lucy. It's great to be here today.
David: Now we're going to be talking around, actually we were just talking about the super bowl because I think you were talking about being a bit of a fan in the footie world?
Neil: I am a fan in the footie world. And that's why I have an investment bond. So that I can one day afford to go to the Superbowl, or to the college football finals in America, or maybe take some time off work.
David: That's the way, isn't it. Clearly as well, we're going to talk around investment bonds. I think there's a big misconception for our readers and listeners out there as to what a bond is today as to what it was 10, 20 years ago. I think Neil, you'll be in the position to answer this as well but bonds in your portfolio, having that mix in there. About the whole idea of some people think, "Well, my portfolio should be made up of X amount. It should match my age, some wise people have said before." But realistically, I think it just depends on your lifestyle. What you want to do and what's coming up.
Starting off Neil. Can you just give us an idea of what is an investment bond. People aren't sure.
Neil: So for those who aren't aware of what investment or what insurance bonds are, they are tax paid investment structure that has a range of investment options for an investor to invest in. Anything from a cash option all the way through to say, a high-growth option. And the investor can invest in that structure, in that particular underlying fund. And through the term of that investment bond, which is usually 10 years at a minimum, we pay the tax on the growth of those assets on behalf of the investor at a maximum rate of 30 per cent.
So investors may have different buckets they want to put their money in to. So they might put their money into say, superannuation which is taxed at a maximum of 15 per cent. They may put their money in, to say, a trust structure which is very common with some high net worth investors. And distribute the proceeds of that trust on an annual basis to the beneficiaries.
Or they may look at something like an investment bond where it's a tax paid investment structure for investors where tax is paid at the maximum company rate of 30 per cent. Now that might be less if there are franking credits in involved. And certainly now products the effective tax rate is somewhere between your 19 per cent and say 26 per cent.
David: You know, saying that as well, there's always the idea ... Like I said at the beginning, people have their own opinions on bonds. Some people we were just talking to our AV guy, Sam. He was saying he bought a bond years and years ago and he's got the whole paper dollar virtue of it and he has to go to the bank to trade it in. But we're dealing with something now which is essentially you can access this whenever you like. Bonds aren't a 10 year ... Although they're a medium to longterm investment, they're not a 10 year you're stuck kind of placement are they?
Neil: No they're not. If you need access to the money, you can access it at any time. So, there's no time period. But you will have to pay some form of tax on the growth component of the investment bond if you make a withdrawal prior to the 10 years. After the 10 years, there's no tax obligation on the investor once they've held it for 10 years, if they make a withdrawal. And because this an investment or insurance bond is also an insurance policy, there's also no tax paid on death. So the proceeds of the bond on death pass either directly to the beneficiaries or to the estate, tax paid.
David: It would have already been sorted out looked after.
Neil: We've paid the tax on the investor's behalf on the way through at a rate of 30 per cent as a maximum. Or in the case of death, you can just hold the bond for one day. And if you passed away the next day, the proceeds of that pass directly to your beneficiary without any tax obligation.
And the other great thing about these is that they also sit outside the will. So on proof of death, we'll pay the face value of the bond. And there's no need for probate or anything like that.
Lucy: Yes, so given the different ways that it can fit within an investment portfolio, one of the things that we're seeing a lot on Nestegg is people talking goals based investing. I mean do you see bonds fitting within this attitude towards it?
Neil: Oh for sure Lucy. I mean one of the great things about investment bonds is that the structure enables investors to grow their wealth, to protect their wealth and to efficiently transfer their wealth. So we were talking about my goal before about going to see the Superbowl.
Neil: Hopefully before I'm too much older. But if I've got personal goal ... and a lot of people say my age group are looking taking a mature age gap here that's very popular these days where they may want to have a career change or fund some retraining around a career change. If you know at a particular age, that in 10 years time you may want to do something like that. So if you're in your late 30s now, by the time you hit your late 40s, you say, "Well. I want to take a year off," and the value of taking that year off may be $100,000 in after tax money, you may want to start saving towards that goal.
At the other end of it, there's clearly the education funding opportunities that sit around using investment bonds. And again it's very popular these days for many people who finish their high school learning, whether it be the high school certificate or an IB or something, that they may want to take a year off before they start their tertiary education. And in many cases, parents need to fund it. Again, if you set something up like that when your child's around eight, by the time they're 18, you're then able to access those funds in a tax effective environment.
Then finally, the transfer of wealth, because as I mentioned before, this is an insurance product with an investment component to it. Investors are able to nominate beneficiaries. And what we see today is that many grandparents love their grandchildren far more than they love their own children and wanting their wealth to-
Lucy: Well, they're not the ones bringing them up.
Neil: On the state side, just open the can of worms.
Lucy: They can give them back.
Neil: But you know, in many cases, many grandparents today, we talk to them all the time. They're saying, "We want our wealth to skip a generation but we do want to say, leave our family home or something like that to our children. But we want our cash to go our grandchildren to help with funding their gap year, getting them to see the world, et cetera, et cetera." And this is a very efficient way for them to transfer their wealth because they can open an investment bond. They can nominate their grandchildren or grandchild as the beneficiary. And then on their death, the proceeds of that investment bond go directly to those beneficiaries.
David: I think this is a really interesting conversation from I've got it so far. We're nailing it in terms of ... it's all about lifestyle. This isn't something where ... I know I've spoken to a lot of investors where they gone, "Why would I look at bonds when my shares have done X percent." 2017 was an absolute stonker of a year in the markets.
But when you look at it as part of the broader spectrum of things in your life that are bound to happen, or you want to happen, or you want to make happen, you can't always rely on everything which has had good year, or a good month, or a good five years. Let's look at this in terms of a broader picture and how you can really invest your assets and your belongings into something which is more tangible in the longterm future.
Neil: And the beauty of this kind of structure is you can have an Australian share portfolio along with a cash portfolio in this structure and you can split it between the two. So in our bonds, we have an Australian shares option that has performed exceptionally well over one, three and five years. So it consistently performed very well.
And in addition to that we've also got a Cash Plus fund that an investor can invest in. So if they want a blend of the less investment option or less risky investment option, they can have a percentage in say a cash option and a percentage in an Australian shares option or a balanced option, or growth option, whatever it may be.
So to your point Dave, there is now a range of investment options that exist within these structures that 20 years ago when these things were seen as fashionable and we're bringing them back-
Lucy: Yes. They're coming back. Bond is back.
Neil: Bond is back.
David: Neil is going to make bonds sexy again.
Lucy: Yeah. Daniel Craig.
Neil: Just don't put a photo of me up. But you know, I think I may have said, it's a tried and tested tax structure that's been around for decades. And there's been very little change to it while other kinds of tax structures, things like superannuation and other things, we have seen constant change within those structures.
Lucy: Well I mean, on super that's the thing that when you've been speaking today, I've been thinking of the similarities with super. So for investors who have got a sum of money and they're thinking, "Do I put this into my super where it's going to be taxed at that 15 per cent rate at most? Or should I think about bonds?" What would you say are the key, I supposed, elements that they should be considering when they are making these decisions?
Neil: Investors need to look at a number of things. And I think the first thing they need to have a look at is really understanding the limits of getting money into superannuation and getting money out of superannuation.
Lucy: Yeah, totally.
Neil: So, there may be some other investors out there who may be receiving quite a large inheritance from some elderly parents or something like that that may push them over the super caps of the $1.6 million each. I mean it would be a nice position to be in. But I'm sure there are people who are in that position where they say, "Well I'm looking at my inheritance as a means to funding my retirement." But they are now, as I said before, there are now limits around what you can put into superannuation. And then what you can get out.
Whereas with something like an investment bond, there's no limit on the initial contribution that you make into the investment bond. And there's no limit on what you can withdraw either. Or you can use it like an allocated pension after 10 years and do partial withdrawals.
David: Yeah. For sure.
Neil: So understanding the limitations of getting money in and getting money out is one thing, I think, investors need to have a look at when making comparisons because most people these days, will look to make a comparison.
The other thing worth considering may be understanding the estate planning or looking at how they want to transfer their wealth. And if they have financial non-dependents as children who they're looking to leave their superannuation to, well there may be taxation implications around the transfer of wealth out of superannuation. Particularly to those financial non-dependents.
So both the limitations around money in and money out and also looking at maybe estate planning considerations.
And then the third thing, a super is by far and large probably one of the most tax effective longterm savings vehicles you can have. But it's also looking at, what I would call the segregation of assets. So you've got your buckets of money. So you've got your superannuation money that's for your retirement. And then we'll call this a rainy day bucket or our gap year bucket or our first class around the world bucket or whatever, our ticket to the Superbowl bucket. And that's a an important thing if you're on a high marginal tax rate then 30 per cent then this may be worth considering as a structure to invest in for any kind of savings goal.
Lucy: Yeah. I think it's a good point you make. You just can't tap into your super to go to the Superbowl. Like it's super Superbowl. I mean it's not going to happen. You know, you've got to have a bit of thought about it.
David: Unless you're over 60.
Lucy: Yeah. Well I mean that's the thing unless you're actually are retired.
David: It's almost as well. It all comes down to how savvy the investor is as well. If they're thinking in the right mindset where ... This is just me personally, I haven't taken much consideration. Maybe because my age demographic don't really think about estate planning or retirement age care at this stage. But for being savvy and thinking about where do you want your investments to go? How do you protect your investments over a long time, that's something which you can always ask yourself that question. But it's just I guess ... Where would you find that kind of information across this space? Would you look at online? Or would you ask a mate? How would you get that?
Neil: Well I think there's a number of ways. By far and large, most investors ask a friend. Or ask for a referral. What I find is that many of our clients come by referral. And as we all know today, it's very common to ask Google anything really.
Lucy: You can ask Google about your super balance.
Neil: Yeah, you could ask Google Home if your accounts are linked to your iCloud. You could ask Google Home-
David: Google knows all.
Neil: Google will know everything. But you know look, investors could come to our website and we've got a range of strategies that they can have a look at. They can Google us, Centuria, Centurian investment bonds. And also to get a more non-commercial view of what investment bonds are. There's also the Moneysmart website. And of course there's some great articles on investment bonds on Nestegg.
David: Yeah there is. Some familiar faces on there isn't there.
Lucy: Advice from you.
David: That's nice as well. We've a summary to this as well. I really love the idea of ... and before speaking with you and before getting to know you personally as well, we have investment bonds in general are something where you can make amounts wherever you like. With super, super's super. Super's something which is designed for your retirement whereas investment bonds can be something which is a little bit more fun. Something which you've been wanting to do in your life for a long time. And a lot of people, especially of our investors that we speak to, have aspirations to do that.
So I think, think about what you can do with your money. Think longterm as we always do. You've got probably, I'd say, on average there's people out there which have got a lot more than I do. Or 10, 20 years of investing to get through first. But you can always think today.
Neil, is there anything else that you want to cover across just for our readers to ... how they can get more access to this? I know you're an avid writer.
Neil: As I said, they can look at some of the articles on this great publication. Or they can come to our website and look at some of the strategies.
Lucy: Thanks Neil.
Neil: You know we've got an interactive calculator there where if you've got a savings goal, you can plug in a number and look at what you need to do to get there. Or they can give us a call. Our investors services team can give them some general information about ...
David: Awesome stuff. Neil, thanks for coming in mate.
Neil: Thank you.
Lucy: Yeah, thanks.
Neil: It's been great fun.
David: Thanks for tuning in to the Nestegg podcast this week. You can also follow us on Facebook, Twitter, we're all over the social media these days. And if you need any other coverage across here, you can always check out our newsletters and websites as well, Nestegg.com.au. If you're planning investing and managing.
So that's all for me. Thanks again for listening and see you soon.