Investment bonds provide a better after-tax outcome when compared to term deposits or a managed fund with a similar asset allocation, according to an investment comparison calculation from Foresters Financial.
The comparison assumed a $250,000 initial contribution, with subsequent yearly contributions of $25,000 over a 10-year period. The data showed that on an after-tax basis an investment bond is a better option for an investor on the highest marginal tax rate.
Foresters Financial CEO, Emma Sakellaris, said that although investment bonds and managed funds provide a similar return, the true benefit of an investment bond is its advantageous tax treatment.
“Investment bonds have a maximum tax rate of 30 per cent on earnings in the bond paid at a fund level, so investors are able to invest and build wealth without increasing or adding to personal income tax liabilities.
“Additionally, if held for 10 years investors can access the funds as a tax-free lump sum or via tax-free regular withdrawals without any capital gains tax or personal income tax implications.
“Investment bonds are particularly useful investment option for high-income earners as the earnings from investment bonds are not declarable on tax returns unless withdrawn prior to the 10-year mark.
“Of course, it is possible to access an investment bond before the 10-year mark, although some of the tax benefit will be lost.”
Foresters’ research showed that a $250,000 initial investment, with a subsequent annual contribution of $25,000 over 10 years would have the following outcome for a taxpayer on the highest marginal tax rate:
| Investment bond | Term deposit | Managed fund | |
| Total investment | $475,000 | $475,000 | $475,000 |
| Total income | $180,191 | $158,248 | $207,410 |
| Net tax payable | $ – | $71,212 | $49,293 |
| Net proceeds | $655,191 | $562,036 | $633,116 |
The following assumptions apply:
| Assumptions | Investment bond | Term deposit | Managed fund |
| Initial contribution: | $250,000 | $250,000 | $250,000 |
| Subsequent contribution each year: | $25,000 | $25,000 | $25,000 |
| Investment term: | 10 years | 10 years | 10 years |
| Gross return assumptions: | 6% | 4% | 6% |
| Marginal tax rate: | 45% | 45% | 45% |
| Franking credits: | n/a | n/a | 100% |
“Investment bonds suit a variety of personal circumstances, whether it is as an alternative or supplement to superannuation, estate planning, investing on behalf of children, or a means by which to save for future significant purchases.
“For Australians who have reached their superannuation contribution limits and still plan to accumulate wealth, this is a great alternative strategy to consider as it comes with the added tax benefits as shown in our research,” said Sakellaris.