Summary

Like Super, an investment bond has favourable tax treatment but comes with less stringent rules around when and how you can access your money. In the first year, there’s no limit to how much you put in, so investors can start with a large sum no matter their age.

Tax is paid within the fund (at 30%) which means it doesn’t count towards your annual income or get declared in your tax return. The standard term is 10 years, but you can access before that if you need to (forfeiting tax benefits) or leave it in for up to 40 years.

Their situation

As Andrew heads towards retirement age he seeks a way to keep growing his wealth with the intent to create an income when he stops work. An investment bond is a long-term play for him.

Up until now, he’s focused on Super, maxing out his contribution limits each year, but he’s reluctant to keep throwing all his extra cash there.

What if he needs it? What if he loses his job? Life changes? Or there’s an unexpected expense? He wants to explore other options where he could get at his money quickly if he needed to.

Andrew is keen to explore tax benefits because he believes ‘I’ve paid my tax on the way in, why do I need to pay it when I take it out?’.

Why an Investment Bond was a good strategy

An investment bond is a good strategy for Andrew because it can work alongside his super without restricting access to cash if he needs it.

• A 10 Year Investment Bond meant his money was still earmarked for retirement but with the flexibility to take it out if he needed, with the understanding that if it is before 10 years he will need to pay some tax.

• There are no caps to the initial investment, so Andrew can put in whatever amount he wanted to begin with.

• He can continue to add funds each year, but no more than 125% than the previous year.

• As Andrew gets closer to retirement age, he has the flexibility to change his investment profile to a lower-risk investment option.

• Investment Bonds are a tax-effective investment as tax is paid within the fund at 30% (less than his current tax rate), so he won’t need to add to his taxable income each year, provided it is kept in for 10 years.

• Andrew can access his money if he needs to, but because his goal is retirement, he’s happy to keep it out of reach for 10 years.

• Because the tax is paid within the fund, Andrew doesn’t have to pay tax on the way out when he starts to create an income from it after 10 years.

• Once he starts to withdraw funds after 10 years, he can adapt the amount he takes out each year and it won’t impact any entitlements he may get.

• If Andrew kept his money in there for the full 10 years, he effectively pays no tax on the earnings as it’s paid by the fund.

• He was able to nominate a beneficiary to inherit his investment bond knowing they wouldn’t pay an inheritance tax on the way out.

Outcome

Andrew had another way to save for retirement that was tax-effective, while still having the flexibility to access it if he needed.

He didn’t have to worry about caps, limits, and declaring returns on his income.

This information is intended to be general in nature and was prepared without considering your personal objectives, financial situation or needs. Please consider the information contained in the Product Disclosure Statement and Target Market Determination before deciding to acquire the products. Please obtain independent professional advice from a qualified financial adviser, registered tax agent or lawyer before making any decisions. Past performance is not a reliable indicator of future investment returns. Tax laws may change in the future which may affect an investor’s tax outcomes. While all reasonable care has been taken in producing the information, to the extent permitted by law, Foresters Financial makes no representations and gives no warranties of any kind in respect of the accuracy or completeness of the information. Financial services are provided by Foresters Financial Limited (ABN 27 087 648 842, AFS Licence No. 241421).