Invest Smarter – The resurgence of investment bonds
Once mainly considered an alternative investment to superannuation, investment bonds (also known as insurance bonds) have re-emerged and are now being more broadly understood as a genuine solution for smarter investing.
More advisers are moving away from pigeonholing investment bonds mainly as an alternative to superannuation and, instead, are considering the use of investment bonds for a larger range of clients and a broader range of investment strategies.
These strategies can range from finding ways to manage and provide value in estate planning, to tax saving strategies, and investing for a child. For high-income earners, investment bonds are rapidly growing in popularity due to benefits such as tax being paid by the provider and the ability to access money at any stage.
As a result, clients ranging from high-income earners, pre and post-retirees, as well as parents and children – are benefiting from these investments that are proven to be both tax-effective and flexible. As well as an alternative to superannuation, investment bonds are being seen as versatile and can be used as an investment diversification tool, as well as a savings vehicle for working towards a specific goal.
At their simplest, investment bonds combine features of a managed fund and a life insurance policy, with the added benefit of the investment bond provider paying 30 percent tax on any earnings in the bond, rather than an individual paying tax on earnings at their marginal tax rate.
Tax benefits and the 10-year and 125% rules
With the bond provider paying this 30 per cent tax, if you hold the bond for 10 years, then as long as you also comply with the 125% rule (see below for more details) you will not pay any personal income tax on the earnings.
So long as the contributions made to the bond each year are not more than 125% of the contribution made in the previous year, they will be considered part of the initial investment. If the bond owner makes contributions that are more than 125% of the previous year’s investment, the 10 year period resets.
If the bond owner meets the 10-year and 125% rules they are not required to pay any personal income tax on the investment when they make a withdrawal, regardless of how long beyond the 10 years they hold the investment and whether they make any contributions or withdrawals. Tax offsets of up to 30 per cent apply if a withdrawal is made in the first 10 years.