Investment Bonds – The Pros and Cons

You may have heard of Investment Bonds (also known as Insurance Bonds) as a long term tax effective investment, but what are they and what are the pros and cons?

What are Investment Bonds?

Investment bonds are “tax paid” investment savings plans that are taxed within the bond at 30%.

This means you don’t personally need to pay the tax and if you pay a higher rate of tax then the Investment Bond could be a tax-effective way to invest and save over the long term.

They’re designed to be held for at least ten years, upon which withdrawals are tax free.  If you access your money before ten years there could be tax implications.

What are the uses of an Investment Bond?

They can be used for purposes such as investing for a child’s education, saving for other large goals or as a substitute for superannuation (if you’ve reached your contribution cap or want to access funds prior to retirement)

Another use is to ensure a specific beneficiary will receive the invested funds should you pass away

What are the tax implications?

As Investment Bonds are “tax-paid” investments where earnings are taxed at 30% along the way you won’t have to pay any tax on any profits made upon withdrawal after ten years.  If you’re paying substantially more than 30% personal income tax, an investment bond could be a tax effective structure, but if you’re in a tax bracket less than 30% an investment bond may not be tax effective.

Some or all of the profit you make if making a withdrawal within the first ten years may be taxed at your personal tax rate, in addition to the tax paid within the bond.  You will receive a 30% tax offset though to reduce the amount of tax you need to pay.

One important thing to know is if the amount you contribute to the investment bond in a particular year  is more than 125% of what you put in the year before, the 10 year period will reset.

What are your investment options?

There are usually a number of investment options available within the bond.  You can choose between things like cash, fixed interest, shares, property or a mix of various diversified investment options.

Choosing the right investment options depends on your personal goals and appetite for risk.  Bear in mind the value of an investment bond can rise or fall according to the investment performance. (in this regard an investment bond is quite similar to a superannuation fund)

Investment bond Pros and Cons

Potential Pros

• Money can be withdrawn at any time
• Growth or income earned does not need to be included in your tax return unless you make a withdrawal in the first ten years
• Tax effective if you’re a high income earner
• A range of investment options available
• Can be an effective way to invest for a child’s future
• Certainty about leaving the money to a specific person tax free
• Potentially useful for people who can’t contribute to super

Potential Cons

• Tax is applied on any income and capital gains at up to 30%
• If money is withdrawn within 10 years some or all of the profits on the withdrawal will be tax at your personal income tax rate
• Fees are charged which vary depending on the provider and the investment options
• If more than 125% of your previous year’s contributions are made the 10 year investment period will re-commence
• You won’t have direct control over the investment decisions
• Some investment bonds have a minimum balance that needs to be maintained so it’s important to read the individual product document for details.

It’s always a great idea to seek advice and information before investing in anything.  Seek the guidance of a qualified financial planner before deciding if an investment bond is right for you.