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Investment Bonds; Like super – but simpler

The COVID-19 pandemic has had a significant impact on every area of our lives. For many of us, it can feel like our lives have been turned upside down and the direction ahead can seem unclear.

The COVID-19 pandemic has had a significant impact on every area of our lives. For many of us, it can feel like our lives have been turned upside down and the direction ahead can seem unclear. But even amidst the current uncertainty there is still the opportunity for us to support our long-term goals, aspirations and objectives.

For many of us when it comes to long-term planning, there may be confusion or a sense of conflict as to where we should start, what we should be focusing on, and how to achieve it.

  • Should I be paying my mortgage down?
  • Should I be topping up my superannuation?
  • Should I be saving for my child’s immediate or future education costs?
  • And of these, how do I get the right balance of tax effectiveness and flexibility?

For investors and savers looking for tax concessions, it is often assumed that superannuation is the only vehicle available to Australians. Whilst the tax efficiency of superannuation with its capped tax rate of 15 per cent on investment earnings is well known, this tax efficiency needs to be weighed against the issue of investment liquidity. Preservation age and meeting a condition of release, as well as compliance with the contribution caps, also need to be considered.

After all, investing in the most tax effective manner doesn’t count for much if you cannot access your money when you need it most!

Less well known is that investment bonds are also a tax-advantaged option.

Although not quite as tax effective as superannuation, investment bonds do have additional advantages over super – they do not carry the restriction on withdrawals prior to preservation age, and they do not have formal contribution limits1.

The main appeal of investment bonds is their tax benefits, particularly for those on moderate to higher rates of personal tax and with income surplus to their lifestyle needs. The tax treatment is simple – it isolates investment bond income from the investment bond holder’s other income. When held for the full 10-year term, withdrawals are tax-free in the owners’ hands.

Due to the capped tax rate of 30 per cent, an investment bond is an option for those wanting to invest in the name of a child. It provides a minor with access to a vehicle that can minimise exposure to the full minor’s penalty tax rate of 45 per cent2. This is why investment bonds are often used as saving instruments for long term goals, such as funding school fees.

An investment bond can provide a neat and simple alternative to saving for a home (on the assumption the saver gains regular salary increases and does not expect to buy a home for a decade or more). Used in this manner they offer the same or similar underlying investment options as a traditional managed fund. Furthermore, if withdrawn after 10 years, the proceeds are free of further tax assessment, with no personal CGT consequences.

Investment bonds are also an attractive option for those who aim to retire on their own terms, prior to reaching preservation age, or who wish to decrease their working hours while keeping a steady income flow available. They may particularly attract those who have ‘maxed out’ annual superannuation contribution concessions.

Where the investment bond really shines is in estate planning. An investor can nominate beneficiaries within the investment account – including charities – to receive the proceeds tax free upon the investor’s death, irrespective of how long the investment has been in place. The investment bond does not form part of the deceased’s estate, so it is not subject to the usual probate delays or costs. All funds transferred to the beneficiaries on the death of the life insured are tax free, irrespective of their age, and do not need to demonstrate a level of dependency upon the original owner, as is the case with superannuation.

Whilst investment bonds are not necessarily the singular solution for everyone’s investment needs, they are certainly worthy of consideration as a vehicle through which to build wealth, tax-effectively as well as transfer wealth between generations in the manner they were intended

Opportunities that investment bonds offer

  • Investment outside superannuation (for those who are capped out; too old; too young).
  • Retirement prior to superannuation preservation age.
  • To create tax effective income streams outside superannuation.
  • Managing superannuation death benefits for non-dependent beneficiaries.
  • Reduce taxable distributions from Family Trusts to members.
  • As earnings retained within the investment bond structure are not added to assessable income it may enable the investor to:
    • maximise or retain eligibility for health insurance rebate or Family Tax Benefit Parts A & B,
    • maximise tax offsets, SAPTO, LITO, or Seniors Health Card,
    • minimise Medicare Levy or Deficit Levy,
    • maximise tax efficiency and CGT mitigation within existing gearing strategies.
  • Simplified, effective and streamlined estate planning, or protection from
  • To invest inheritances, windfalls and lottery winnings effectively. creditors in the event of bankruptcy.
  • Asset protection for vulnerable or minor beneficiaries.

1. Investment bonds do not have a limit within the first 12 months, contributions in the following and subsequent years are subject to the 125% rule.

2. abs.gov.au

by Greg Bird, Head of Distribution & Strategy – Life & Super, Australian Unity

Disclaimer: This article is not legal advice and should not be relied on as such. Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. You should obtain financial advice relevant to your circumstances before making investment decisions. Where a particular financial product is mentioned you should consider the Product Disclosure Statement before making any decisions in relation to the product. Whilst every care has been taken in the preparation of this information, Australian Unity Personal Financial Services Ltd does not guarantee the accuracy or completeness of the information. Australian Unity Personal Financial Services Ltd does not guarantee any particular outcome or future performance. Australian Unity Personal Financial Services Ltd is a registered tax (financial) adviser. Any views expressed are those of the author and do not represent the views of Australian Unity Personal Financial Services Ltd. If you intend to rely on any tax advice in this document you should seek advice from a tax professional. This is a publication of Australian Unity Personal Financial Services Limited ABN 26 098 725 145 (AUPFS), AFSL 234459. This document produced in July 2020. © Copyright 2020

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