Investment Bonds: What are they and how can they be useful?
A common question the Financial Adviser’s at Mulcahy & Co receive is “I want to invest for my child’s future, what is the best way to do so?”
Investment Bonds are a type of life insurance contract in that they have a bond owner (the investor) and a life insured (the investor, or a beneficiary the investor nominates). Similar to Superannuation, the beneficiaries are nominated to receive the benefits held in the Bond on either the event of the death of the bond owner, or a future nominated date.
Bond’s are becoming more and more popular and offer access to a wide range of investment options and strategies that can be tailored to an individual’s personal needs and circumstances, as well as their personal risk tolerance.
Danny Archer
Another similarity to Superannuation, the income and growth is not distributed to investors, and instead remains invested inside the Bond environment. With a maximum tax rate of 30%, this can be particularly attractive with those on marginal tax rates of 30% and above. Contrary to Superannuation, however, Investment Bonds effectively do not have a contribution cap which creates more investable opportunity in the early days, as long as the 125% rule is met. Your Adviser at Mulcahy & Co can help explain this to you.
A key benefit of a Bond is that they have been designed to be held for greater than a 10-year period to provide the optimal tax advantage. The pro here is that all funds held within the bond that are withdrawn after 10 years are treated as completely tax-free income to the investor. I will give an example:
Harry starts an Investment Bond in Jan 2022 and contributes $100,000. If, by Jan 2032, the Bond value has increased to $200,000, representing a $100,000 capital gain, Harry can withdraw the full balance tax-free. Also, Harry has not had to declare any of the income from the Bond in any of his tax returns, which is handy to him as his marginal tax rate is 45%. While the maximum rate of tax payable inside a Bond is 30%, the underlying asset structure inside Harry’s Bond meant the average annual tax rate was 15%, highlighting further benefit to Harry.
If a Bond is used wisely, it can help with estate planning and providing for the next generation including children and grandchildren. This opportunity is available due to the ability to transfer the Bond to a nominated beneficiary at a specified date in the future completely free of capital gains tax.
Using the above information to circle back to the original question around investing for children, a Bond is a great option. The investor (parent) can invest as much or as little as they like in the Bond with the intention of either withdrawing the funds altogether to gift to their child at a specified date in the future, or they can simply transfer the ownership of the Bond to their child; both outcomes can be 100% tax free. Some common examples are to help with school fees, and at age 18 to assist in buying a first car, or age 21 to help with a house deposit. Further, the investor will not pay any additional tax in their personal name through the duration of the investment timeframe.
Comparing using a bond to alternative strategies such as saving in the parents own name through shares, ETF’s, cash or term deposits, or even through a Trust, the Bond offers far more tax and flexibility advantages that cannot be ignored.
If you would like to commence an investment plan for your child (or yourself), please do not hesitate getting into contact with an Adviser at Mulcahy & Co today.
Episode 39
Investment Bonds: What are they and how can they be useful? Host Gavin Nash is joined by Financial Planner Danny Archer to chat about this important investment topic.
Bond’s are becoming more and more popular and offer access to a wide range of investment options and strategies that can be tailored to an individual’s personal needs and circumstances, as well as their personal risk tolerance.
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