Here we take a look at the last 12 months in financial markets. With the risks facing Europe and the US easing, we discuss what effect this will have on interest rates and other markets in the year ahead.

We also focus on how our Investment Bonds can work for you as a tax effective and flexible way to save for retirement outside of superannuation.

If you have any feedback or would like to discuss any of the information in this edition, feel free to contact us.

Regards,

Anne Hamieh

Head of Distribution

Perspectives

June 2013

Welcome to another edition of Perspectives.

Financial Markets: Surfing the Interest Rate Wave In last year’s issue of Perspectives we focused on risk and return and volatility in financial markets. The past year has seen the three major risks overhanging financial markets recede, to some extent. Those risks were the collapse of Europe, the fall in commodity prices caused by reduced demand from China, and stalled growth in the US.

Globally, as these risks receded through the latter part of 2012 (they have not disappeared) markets responded with growth in equity markets and asset values beginning to stabilise.

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A global theme over the past year has been the effort by central banks to weaken their currencies by reducing interest rates in order to assist economic growth and exports. This has been characterised by the use of what is termed Quantitative Easing (QE) by the US, Europe and more recently, Japan (see explanation of QE on the next page).

The result of this has been to push global interest rates to unprecedentedly low levels in some instances, as the table below illustrates.

For markets to hold current gains company earnings have to be steady to improving and interest rates need to remain low.

Country Current Rate

Previous Rate Change Last

Change

Australia 2.75% 3% -0.25% 8/05/2013

European Monetary Union 0.75% 1% -0.25% 5/07/2012

Japan 0.1% 0.3% -0.2% 19/12/2008

New Zealand 2.5% 3% -0.5% 9/03/2011

United Kingdom 0.5% 1% -0.5% 5/03/2009

United States 0.25% 1% -0.75% 16/12/2008

A side effect of this has been the need for investors seeking income returns to shift from pure debt instruments such as cash, term deposits and bonds. And most of this money has flowed into sharemarkets with the result that they have performed very strongly. The US, which some commentators were prepared to write off 18 months ago, has rebounded strongly with housing starts at nearly double their April 2009 lows. The US Dow Jones Industrial Average and S&P 500 Sharemarket Index are both trading at all time highs.

Australia: growth challenges ahead

Here in Australia, the economic impact of the GFC was not as severe as elsewhere as our banking system did not collapse and we were supported through the worst of it by the mining boom. As a result the Reserve Bank of Australia (RBA), although it has reduced the cash rate from 4.75% in November 2011 to 2.75% currently, has not had to resort to QE. Although this is the lowest cash rate in Australia since 1959, rates here remain high by global standards and as a consequence Australia became a “safe haven” economy. This has seen a flood of overseas funds into Australia seeking yield and pushing up the $A.

These reductions in interest rates have not only benefitted the sharemarket - the S&P/ASX 200 Index has risen more than 20% since June 2012, although it has not yet exceeded its pre GFC high of 6,754 points. The value of high yielding assets such as bonds and real estate have also benefitted.

Falling interest rates and the associated expectation of improved economic activity have seen a rerating of global markets. This has been particularly evident in Australia in assets with high and sustainable levels of income, such as the major banks and Telstra. For example, the share price of Commonwealth Bank of Australia (CBA) has increased 46% since late May 2012, and Telstra 43%.

For markets to hold current gains company earnings have to be steady to improving and interest rates need to remain low. Inflation does not look to be a medium term issue at present. However, having been sustained through the GFC by demand from China for resources, which shows some signs of slowing, Australia now faces similar growth challenges which less fortunate countries have been grappling with for the past five years.

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What is ... ? Quantative Easing

Normally, central banks try to raise the amount of lending and activity in the economy indirectly, by cutting interest rates.

When interest rates can go no lower and a central bank wants to encourage people to spend, not save, its only option is to pump money into the economy directly. That is known as quantitative easing (QE).

The way the central bank does this is by buying assets - usually government bonds - using money it has simply created.

How does it work? Under QE, a central bank purchases government bonds from private sector companies or institutions, typically insurance companies, pension funds and large banks.

This increased demand for the government bonds pushes up their value, making them more expensive to buy, and a less attractive investment compared to other assets.

This means that the companies who sold the bonds may use the proceeds to invest in other companies or lend to individuals, rather than buying any more of the bonds.

The hope is that as banks, pension funds and insurance firms, become more enthusiastic about lending to companies and individuals, the interest rates they charge fall – resulting in more spending the boosting economic growth. Is this printing money? Today, central banks don’t have to literally print money - it is all done electronically.

However, economists still argue that QE is the same principle as printing money as it is a deliberate expansion of the central bank’s balance sheet and the monetary base.

Capital Guaranteed

Through careful asset selection and prudent management at Centuria we have been able to capture some of this market improvement, to the extent allowed by the Benefit Fund Rules for each Bond.

The performance of the underlying assets of both the Capital Guaranteed Bond and the Income Accumulation Bond has been at or above expectations given the narrow cash and fixed interest markets they are restricted to. The introduction of new capital standards by APRA will affect the declared bonuses of the Capital Guaranteed Bonds.

Unit-Linked

Our Unit-Linked Bonds have been structured to take maximum advantage of the recovery in markets within the scope of the Benefit Fund Rules for each Bond.

We will update you on full year performance in our Investment Bond Review, which you will receive with your Annual Statements in early September.

What does this mean for your Bond?

New Centuria Investment Bonds Product Disclosure Statement (PDS) We have issued two new Centuria Investment Bond PDSs which replace the Flexible Investment Bonds PDS dated 7 May 2009, and accompanying Supplementary PDS dated 20 October 2010. We have separated the Capital Guaranteed and Unit-Linked Options, making the PDS easier to understand. We have also revised the fee section to reflect changes in financial adviser fees resulting from Future of Financial Advice legislation. We have also reduced the management fee of the Australian Shares Bond. You can find a copy of the PDS on our website www.centuria.com.au/financial services.

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Superannuation is a tax effective way to save for retirement. The maximum tax payable on superannuation is 15% compared to the highest personal marginal tax rate of 46.5% (including the Medicare levy and soon to be 47%. However, there are limits and constraints with superannuation and therefore, it is prudent for investors to consider alternative tax effective structures such as investment bonds, (also known as ‘insurance bonds’) to complement superannuation.

The constraints of superannuation 1. Limited contributions To contribute to superannuation an investor needs to meet eligibility rules. This requires the investor to be under age 65 or if age 65 to 75, they need to meet a work test. If eligible, contribution caps will then limit the amount of contributions that can be made to superannuation.

Contributions from an employer (including amounts paid under a salary sacrifice agreement) and contributions for which a personal tax deduction is claimed cannot exceed $25,000 in a financial year.

Update The Government has proposed to progressively increase this contribution limit to $35,000. For investors over age 60, the increase is expected to occur from 1 July 2013 and for those over age 50 the increase will occur from 1 July 2014.

Personal contributions (where no tax deduction is claimed) up to $150,000 can be made in a financial year. Where an investor is under age 65, they may be able to combine the limits for three years to contribute up to $450,000 in a single year.

Warning Penalty tax will apply if either of these limits are exceeded. This penalty tax could be an additional 31.5% or 46.5% tax depending on the limit exceeded.

Changes are proposed to apply from 1 July 2013, to allow excess concessional contributions (employer and personal deductible contributions) to be withdrawn from superannuation with the penalty tax limited to the investor’s marginal tax rate.

2. Access restrictions Superannuation receives tax concessions, but in exchange, access to money is restricted until a “condition of release” is met. This generally means that the investor will not be able to withdraw or use the money until they have reached a “preservation age” and have retired.

Preservation age is 55 for an investor born before 1 July 1960 but increases up to age 60 for those born after this date.

In some cases, such as permanent disability, earlier access may be allowed.

A Centuria Investment Bond is a tax effective savings option

for higher income earners.

How Bonds can work for you: When superannuation alone is not enough

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A Centuria Investment Bond is a tax effective retirement savings alternative - a platform for growth, with the flexibility to meet your indivdual goals. The benefits of Investment Bonds Investment bonds offer a number of advantages and can complement an investment in superannuation. These advantages are summarised below:

1. An alternative tax effective structure Like superannuation, tax is paid by the life insurance company rather than by the investor. The maximum tax paid on the earnings and capital gains within an insurance bond is 30% although franking credits and tax deductions can reduce this effective tax rate. This makes them an attractive savings option for high income earners.

A key feature of investment bonds is that if the investment is redeemed after 10 years, no further tax is paid by the investor. However, if the investment is redeemed within the first 10 years, the investor will pay tax on the assessable portion of growth as shown in the table above.

The investor receives a 30% tax offset to reduce the tax payable on the taxable amount.

Tip With tax at only 30%, investment bonds offer a tax effective savings option for high income earners, especially if the money can be left invested for at least 10 years.

Withdrawal occurs Taxable portion (of growth withdrawn)

Within first 8 years 100%

In year 9 Two-thirds

In year 10 One-third

After 10 years Nil

2. No limit on the investment amount There is no limit on the amount that can be invested to establish an investment bond unlike the limitations placed on the amounts that can be invested in super. You can also contribute up to 125% of prior year contributions.

Example: Situation Sarah is age 48 and earns $160,000 per annum. Her employer pays superannuation guarantee of $14,400. She would like to save more for her retirement. However, she can only salary sacrifice an additional $10,600 into super without creating an excess contribution.

$14,000 superannuation

guarantee

$10,600 salary

sacrifice

Additional amounts -

potential excess contributions

Superannuation

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3. Access Investment bonds provide investors flexibility to access their money at any time, which can act as a hedge against the restricted access for superannuation. By comparison, access to money in superannuation is limited generally to permanent disability, retirement or death. 4. Capital gains tax simplicity Investment bonds provide simplicity as earnings are automatically reinvested in the bond. This means reinvestment dates do not need to be tracked for capital gains tax purposes. Investors can also switch between investment options without triggering capital gains tax.

5. Bankruptcy protection Investment bonds may offer protection from creditors in the case of bankruptcy, although strict rules apply.

To avoid making excess contributions into superannuation and paying penalty tax, Sarah could make an investment into the Australian Shares Bond and make additional contributions in the future. Sarah can invest a maximum amount of up to 125% of the total amount invested in the previous Bond Year without affecting the original start date of her

Bond for tax purposes. This means that her additional investments will be invested for less than 10 years, and the growth or earnings will still be tax-free. If Sarah makes an initial investment of $5,000 into a Bond, she can invest an additional $6,250 in the second year and build her savings as shown below.

Over 10 years Sarah could invest over $166,000 of which only $5,000 would be invested in the Bond for the full 10 years.

She can withdraw her investment plus any growth or earnings in the Bond at the end of 10 years, tax free. She can continue to make additional investments after 10 years, which will also be tax free on withdrawal.

6. Estate planning flexibility The death benefit from an investment bond is paid tax-free to dependant and non-dependant beneficiaries irrespective of the start date of the Bond.

Death benefit payments from an investment bond provide greater flexibility and control and can be more tax effective in some situations compared to superannuation.

The trustee of a superannuation fund often determines who receives the death benefits and a higher level of tax can be paid on the proceeds if paid to a non-dependant such as an adult child, grandchild, sibling or charity.

The death benefits from an investment bond can be directed to a nominated beneficiary or the estate tax free regardless of who receives the benefit or how long the investment has been held. This greater flexibility may reduce the risk of disputes over estates and enable the benefits to be paid more quickly.

2. No limit on the investment amount (continued)

Solution: Build retirement savings outside of super

Bond Year 1 2 3 4 5 6 7 8 9 10 After 10 years

Contribution $5,000 $6,250 $7,813 $9,766 $12,207 $15,259 $19,073 $23,842 $29,802 $37,253

Total contributed $5,000 $11,250 $19,063 $28,828 $41,035 $56,294 $75,367 $99,209 $129,012 $166,265

Tax Free

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Did you know? Unclaimed Money In December 2012, Commonwealth laws that govern unclaimed money were amended. The amendments changed the definition of unclaimed money such that some money may be identified as unclaimed after a period of 3 years (previously 7 years). For example, this may occur where you do not deposit or withdraw money from a bank account for a period of 3 years or more. Note that the payment of fees or the receipt of interest are not considered to be withdrawals or deposits. Exemptions for particular account types apply. You should speak to your bank for more information.

With Centuria Investment Bonds - which are life policies - money would become “unclaimed’ if your Bond matured and the funds remained unclaimed for a period of 3 years.

We inform Bond Owners in writing about the impending maturity of their Bond. Our Bond Rules allow your Bond to automatically roll at maturity year after year, unless you instruct us otherwise. This means that your Bond maturity proceeds will never become “unclaimed” monies. This feature helps Bond Owners that established a Bond and set maturity date many years ago, who do not want to redeem their investment.

If we are unable to contact beneficiaries on the death of the last remaining Bond Owner, the proceeds due and payable to the beneficiary may become unclaimed money after 3 years. It is important that you keep Centuria Life informed of any changes to your contact details and that of your beneficiaries.

Centuria Property Funds - Latest Offer

Centuria 10 Spring Street Fund

If you are interested in this opportunity, please contact John Taylor or Emma McDaid on (02) 8923 8923 as soon as possible. Further information and a copy of the PDS is available on our website www.centuria.com.au/latest-offers.

Centuria is offering investors the ability to invest in a high quality commercial property located in the core financial precinct of the Sydney CBD. 10 Spring Street represents an excellent opportunity based on the counter-cyclical nature of the acquisition, as reflected by the starting yield payable to Investors of 8% p.a. In addition we believe there are a number of avenues to add value, including improving the leasing profile, and repositioning the retail space.

The key features of the investment are:

• Starting forecast distribution of 8.00% p.a. growing to 8.10% p.a. in year 2*

• Recently refurbished building in a core Sydney CBD location

• Opportunity to add value via leasing, minor refurbishment and retail re-positioning

• Clearly defined exit strategy

• Anticipated close date - late June 2013

*Forecast distributions are subject to the assumptions and risks that will be detailed in the PDS. You should read the PDS before making a decision to invest.

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Important: Issued by Centuria Life Limited (Centuria Life) AFSL230867, ABN 79 087 649 054. Units in the Centuria 10 Spring Street Fund (the Fund) will be issued by Centuria Property Funds Limited (Centuria) ABN 11 086 553 639 AFSL 231149. Investment in the Fund is subject to risk including possible delays in payment or loss of income and principle invested. Centuria does not guarantee the performance of the Fund. Centuria and Centuria Life will receive fees in relation to an investment in products offered, as disclosed in the relevant Product Disclosure Statement (PDS).

We recommend that before an investment decision is made prospective investors consult their financial or other professional advisor. The information in this document is general information only and does not take into account the objectives, financial situation or particular needs of any person. You should consider whether this information is appropriate for you in light of your objectives, financial situation and needs.

Centuria believes that the information contained in this communication is accurate, but makes no representation as to its accuracy or completeness. To the maximum extent permitted by law, Centuria excludes liability for any loss or damage arising from use of the information contained in the communication.

Do we have your correct contact details?If your contact details have changed, please send us the new details in writing to:

Centuria Life LimitedReply Paid 695Melbourne VIC 8060(no stamp required)

For more information about your Bond, please contact Investor Services on 1300 50 50 50.