You may have heard of investment bonds in your travels. Many think of them as unfashionable in the financial world of shares, ETF’s, managed funds, negative gearing and superannuation strategies. There can, however, be a place for them in the right circumstances.
For starters, an investment bond’s earnings are taxed at a maximum of 30%. This is handy for those whose tax rate is higher than that. Furthermore, the tax is paid by the investment bond resulting in no income from the bond being taxed in the hands of the owner. Whilst money can be withdrawn from the investment bond at any time, some of the income may be taxable if withdrawn in the first ten years.
A ‘10 year rule” applies to investment bonds. This means that if you hold the bond for at least 10 years the returns on the entire investment, including additional contributions made, will be tax free subject to the “125% rule”. Investors can make additional contributions each year and provided the contributions don’t exceed 125% of the previous year’s contributions they will be considered part of the original investment. So basically, additional contributions don’t need to be invested for 10 years to get the favourable tax treatment. Be careful, though, as exceeding 125% of the previous years contributions will re-set the 10 year period.
Investment bonds can be invested in a range of investment options. These include shares, cash, property and infrastructure, quite similar to the options available in the typical superannuation fund. This provides the owner of the bond the ability to invest according to their desired level of risk.
Those looking to save long term for a child’s future, seeking an estate planning tool or are unable to contribute to superannuation may benefit from an investment bond. Just like any other investment a bond also carries risks that need to be carefully considered.
If you feel an investment bond may be worth considering, don’t hesitate to get in touch and start a conversation today.
You need to consider with your financial planner (or adviser), your objectives, financial situation and your particular needs prior to making an investment decision. Sensibly Pty Ltd and its authorised representatives (or credit representatives) do not accept liability for any errors or omissions of information supplied on this website
Nick Shanley, Steve May, Luke Styles and Shanley Financial Planning T/A Steve May Financial Services are Authorised Representatives / Corporate Authorised Representative of Sensibly Pty Ltd, AFSL 533923. Please refer to our website at www.stevemayfs.com.au to reference our Financial Services Guides.
