Not too long ago, bonds for special purposes, like education and funerals, were very popular. But as investors become increasingly more sophisticated in their financial planning needs, and the Government removes their tax-exempt status, will friendly society bonds still hold their relevancy to investors? KATE KACHOR reports.
Not too long ago, bonds for special purposes, like education and funerals, were very popular. But as investors become increasingly more sophisticated in their financial planning needs, and the Government removes their tax-exempt status, will friendly society bonds still hold their relevancy to investors? KATE KACHOR reports.
As previously reported in past issues of <I>Money Management<I>, both funeral and education bonds, lost their tax-exempt status for new sales following a Treasury ruling.
The Federal Government has agreed to put back the starting date for the changes until 2001/2002. But for Australian Friendly Societies Association executive di-rector Martyn Pickersgill, he is not overly concerned about the impact of the changes.
“Under the proposed new tax arrangement for life insurance products the effect should be minimal. However, as we are yet to see any legislation, we can’t com-ment, except to say that sales have not been affected to date.”
Pickersgill says that education funds in particular are very popular with middle class parents who view their child’s education as important. “The plan operated by the Australian Scholarship Group currently has 285,000 members, so I guess the level of acceptance is an indication of how popular they are.”
But as popular as they may be, how do they stack up as an investment?
Lend Lease certified financial planner Bruce Gingell is not overly enthusiastic. While conceding that there is a need for products that help clients to pay for expenses, like their children’s education or their own funeral, he doesn’t be-lieve traditional bonds are always the best form of investment for long-term saving.
“While I acknowledge that this type of fund allows investors to target what may be a very large expense over a number of years, there are better investments when long-term savings are being considered.”
Gingell says most of the education bonds are similar to traditional Friendly So-ciety bonds, which only invest in low risk type assets, such as Government secu-rities and cash. For something like education, which is usually a long-term in-vestment, he believes people should be looking at shares or property over five to 10 years.
Investments such as those offered within most managed funds are, according to Gingell, more likely to produce better long-term returns, admittedly with a higher level of risk.
“Managed funds allow investors to match their investment time frame, objectives and risk profile with a range of asset class options. A parent or a grandparent who wants to invest $1,000 initially and $100 per month for a one year old child will most likely end up with around $20,000 after 10 years,” Gingell says.
“This assumes a moderate portfolio, such as a balanced fund invested at 50 per cent cash and fixed interest and 50 per cent in shares. The $20,000 is before fees and taxes.”
He adds that a problem in some education funds is the withdrawal restriction set around the “10 year rule”.
“Some will only repay capital before 10 years and there may also be restrictions on withdrawals for certain education costs after this period.”
Managed funds usually have no withdrawal restrictions and earnings are paid out with capital withdrawals.
“The only proviso I would make,” says Gingell, “is to watch out for exit fees on some funds in the first few years and keep in mind the long-term venture of the underlying assets.”
And friendly societies can be a little bit more casual than managed funds about things like statements. <I>Money Management<I> spoke to an education fund inves-tor who has never received a statement – except upon request.
But Gingell concedes that education bonds may suit conservative investors.
“I have no doubt education funds provide a niche product for people who want to target these costs and are uncomfortable with sharemarket volatility. As someone once said ‘your children only get one chance at life’. At least with a well man-aged long-term asset, the chance of financial burden on their parents can be re-duced.”
On the topic of funeral bonds, Gingell believes that they are specialised prod-ucts and if setting funds aside for a funeral is an issue for a client or their family, he might consider using one. “It doesn’t come up very often, however, I have used them for planning to meet age pension assets test.”
Under the new tax changes, investment income earned by friendly societies on fu-neral bonds, education/scholarship plans and income bonds sold after 30 November 1999, will still be subject to tax at the company rate, but only from 30 June 2001.
Until then, the investment income from products sold after 30 November 1999 will be tax exempt.
