Investment Terms Explained

understanding investments

A useful way to have your money managed for you is to buy a life insurance product such as an Investment Bond.

Insurance bonds deliver returns tax-paid to the investor. There are two types of bonds available, Capital Guaranteed and Market Linked.

Capital Guaranteed bonds are designed for the more conservative investor and the insurance company guarantees the initial capital investment plus declared interest credited to the account.

Market linked products are designed to produce better long-term returns and by their very nature, have a more aggressive asset allocation. The asset allocation for market linked products can have a larger proportion in shares with fewer cash investments. Because of this the capital is not guaranteed, therefore investors’ funds may increase or decrease in line with market conditions.

Allocated Pension

These products are designed for retirees who generally have ceased employment and are looking to receive an income stream during their retirement. They offer you the flexibility to determine when you receive pension payments and to set a level of income appropriate for your desired standard of living, however the government does impose minimum and maximum levels of income.

No lump sum tax is payable when superannuation or rollover money is placed in the account, similarly, investment earnings on the balance of the pension account are not taxed either.

Investment options available under an allocated pension range from low risk capital secure funds, to higher risk market linked funds. You also maintain access to your capital.

Immediate Annuities

An Immediate Annuity allows you to convert money saved for retirement into an income stream. It is an investment that provides a regular income over an agreed period in exchange for a lump sum payment.

Immediate Annuities can be purchased with ordinary money or with superannuation money. If you purchase with ordinary money, annuities may be in single or joint names. Annuities purchased with superannuation must be only in the name of the person who owns the superannuation.

The amount of money required to purchase an annuity depends on current interest rates, the income you want and the features you require. The minimum investment is usually $10,000.

There are three types of immediate annuities:

  • Lifetime – the payment continues for the investors’ entire life regardless of how long they live. A guaranteed period for a lifetime annuity ensures that the balance of the annuity is paid to your estate upon death, should you die during that period.
  • Term Certain – The payment continues for a pre-determined period.
  • Complying Annuity – These must be payable for a lifetime and it cannot be withdrawn within six months. You can only index to the lesser of CPI or 5%.

With an immediate annuity the income component of the regular payment is taxed in your hands at the investor’s own tax rate. The part that represents a return on capital is not taxed.

Australian Equity Trusts

Equity or share funds are designed for medium and long-term investors seeking capital growth and a tax effective income.

The big advantage of investing through a managed fund is that you can gain exposure to a wide range of shares with only a small amount of money. Dividend imputation applies to shares that have already been taxed in Australia. Dividends paid out are called franked dividends and investors receive a tax rebate on them, making this kind of investment extremely tax efficient.

Professional managers take care of the administration of your portfolio and tax reporting, tasks you personally would have to perform if making direct investments.

Diversified Income / Balance / Growth Trusts

Diversified funds are designed for medium term investors who seek capital growth from a diversified pool of investment assets.

A balanced fund tends to provide an even spread of investments over growth assets and income producing assets; for example shares, property, fixed interest and cash. By investing in different assets, the effect of a downturn in any one market is reduced, providing higher stability for the investor.

Capital stable/secure funds will have a higher portion of fixed interest and cash type investments to lower the risk, whereas a growth funds will have a higher portion in shares – a higher risk but generally a higher return.

Property Trusts

There are two main types of Property Trusts available.

Property Securities Trusts invest in property trusts and property companies listed on the stock market. The returns are in the form of income from rental of the properties and capital growth if the trust/share price increases. This type of Property Trust is highly liquid as the investments can be bought and sold like shares.

The other type of Property Trust invests directly in a range of properties and can provide returns in the form of rental income and capital growth of the properties. Regular valuations are undertaken to establish the current market value and therefore any capital growth. This type of trust is not as liquid and usually has a minimum withdrawal period of 6-12 months.

Australian Fixed Interest Trusts

Fixed Interest investments are especially attractive when interest rates are high because the rates can be “locked in” for a designated term. There is also the prospect of some capital appreciation as interest rates fall. Examples of fixed interest investments include government bonds, debentures, term deposits, unsecured notes and bank bills.

Fixed Interest Trusts aim to produce a regular income with some capital growth over the medium to long term. Interest earned on your investment is fully assessable for income tax purposes in the year it is paid even if the interest is reinvested. Income may be subject to provisional taxation.

International Trusts

There are many reasons why investors should consider investing part of their money overseas.

  • It allows the investor to spread the risk by being in a mix of markets and currencies.
  • Investing Internationally provides the opportunity to invest in industries and companies that may not have operations in Australia.
  • The Australian market only represents 1-2 per cent of the worlds capital and has historically not performed as well as world markets.

While it can be quite complicated for individuals to invest overseas directly, investing through a managed fund offers simplicity and the experience of the fund manager involved. You can choose from funds that invest in a number of countries or funds that focus on one country or region.

Cash Management Trusts

Cash Management Trusts act like a bank account while providing slightly higher rates of return from investing in the short-term money market and Commonwealth government backed securities.

Most Cash Management Trusts have many of the same features of an ordinary bank account, including personalised cheque books and automated banking facilities.

Interest earned is fully assessable for income tax purposes in the year that it is earned, even if you reinvest it. Income may be subject to provisional taxation, depending on your circumstances.

Superannuation / Rollover Funds

Superannuation funds are designed to allow contributions to accumulate for a person’s retirement.

There are three main types of superannuation funds:

  • Employer sponsored funds established for the benefit of employees.
  • Industrial funds established under an industrial agreement or award.
  • Personal superannuation funds established for self employed or employees who wish make their own personal contribution.

There are rules governing the level of contributions a person can make and the benefits they can receive in their retirement. Because benefits do have restrictions there is a concessional rate of tax applied to superannuation (15% of contributions and earnings).

Rolling over refers to transferring your money from one concessionally taxed super fund to another.

There are a number of advantages to using this system. Firstly, no lump sum tax is paid on the money you are transferring. Secondly, you continue to receive the concessional 15% tax rate of your earnings from your lump sum rollover.

You can rollover into either another super fund, an approved deposit fund, or a deferred annuity.

For more detailed information or an assessment of your existing investment portfolio, please do not hesitate to contact our office on (07) 5577 8653.

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