Investment bonds are sometimes overlooked as an investment tool but they offer a number of advantages that advisers and their clients should consider, says Emma Sakellaris, CEO of Foresters Financial.
An investment bond is a flexible savings product that grows investors’ money over time to help them achieve long-term financial goals. This can be anything from supplementing retirement savings, assisting in estate planning and intergenerational wealth transfer, investing on behalf of children, or simply investing in a tax effective manner.
Investors can typically choose to invest an amount upfront and/or in addition to frequent contributions during the period the bond is held, depending on their personal savings goal and investment objectives.
“Investment bonds offer a wide range of investment strategies and assets, as well as a unique means of tax-effective investing,” Ms Sakellaris says.
“Indeed, if you were to ask someone to develop, from scratch, a simple, tax-advantaged financial product that would help Australians build up their wealth outside their superannuation and enable the smooth transition of wealth across generations, they would probably come up with something very similar to an investment bond,” she says.
Retirement savings
As a result of their heritage in the friendly society space, investment bonds have the unique advantage of offering a lower tax rate than almost any other investment option, outside of superannuation.
“For people who have reached their superannuation contribution limits but have additional funds that they would like to save for their retirement, investment bonds offer a very flexible tax advantaged approach,” Ms Sakellaris says.
“Investment bonds have a maximum tax rate of 30 per cent on earnings in the bond, so for people on a higher personal tax rate, it is very tax effective. Furthermore, investors do not have to pay any personal tax on the money invested or the interest while funds remain invested.
“If the bond is held for 10 years or more, any withdrawals from Investment bonds after that period are not liable for personal income tax and are not required to be included in tax returns.
“For those concerned about locking their money away in superannuation, investment bonds have the further advantage of allowing people the flexibility to access the funds whenever they wish, subject to certain investment requirements being met,” she says.
Estate planning
Investment bonds are also an invaluable estate planning tool and can complement a will to enable the smooth transition of wealth across generations.
“Many people find setting up legal structures in a will, such as testamentary trusts, a complex and sometimes confronting process.
“However, setting up an investment bond as a way of leaving a lump sum to beneficiaries is much more straight-forward, and also has the significant advantage that it cannot be over-ruled or changed through a challenge to a will.
“The investment bond is simply taken out in the name of the benefactor, and ownership passes to the beneficiary – for example, a grandchild – when the benefactor passes or when the child reaches a certain age.
“You can nominate a beneficiary anytime to receive the proceeds of the investment bond in the event of your death—tax free—without needing to apply for probate or for your estate to be potentially contested. No annual review or renewal is required, and you can update your nominated beneficiaries at any time.
“There are also tax benefits for beneficiaries. It’s a very tax effective way for a child to be given capital which they cannot access until they reach a certain age. And all the time, the bond is accumulating returns without the high rate of tax that minors pay coming into play on earnings within the bond, or affecting their personal tax when they start work.
“Additional contributions can also be made year by year on behalf of the beneficiary if an ongoing plan is established,” Mr Sakellaris says.
Investing for children
An investment bond is also an option for those looking to invest for their children as it allows for the simple transfer of wealth to children, again tax free.
“Ordinarily, any investment held in the name of a minor is taxed at the highest marginal tax rate; however because investment bonds have a capped tax rate, an investor will only pay a maximum of 30 per cent tax on the earnings while they are invested in the bond.
“Further, when a nominated child reaches an age of your choosing, there is no capital gains tax paid on the transfer of the policy. Additionally, the start date of the 10-year rule remains from the start of the policy, so the child is closer to tax-free withdrawals from the fund.
“Once the child receives the money, they can spend it however they like, with no further restrictions on its use.”
Ms Sakellaris says it is clear there are many benefits of investment bonds that are often overlooked.
“As far as regular savings plans are concerned, the advantages of an investment bond are hard to beat. You can typically choose to invest an amount upfront and also make regular additional contributions over time, secure in the knowledge that your investment had been made in a tax advantage environment,” she says.