In the ‘70s and ‘80s an investment bond, also known as an insurance bond, was a very popular investment vehicle that went out of vogue as the popularity of the managed fund increased. But there is still a place for the investment bond.
Investment bonds should be viewed as a tax structure as opposed to an investment choice, not dissimilar to Superannuation.
Earnings within the bond are taxed internally and if withdrawn after 10 years are considered tax paid. There is a formula used to calculate the tax applied to any withdrawals from within the bond within 10 years.
This is particularly useful for children as they are penalised for all unearned income above $416pa with tax rates as high as 66 per cent. The investment bond is a very effective strategy for investing on behalf of a minor as the earnings are taxed internally and not subject to these penalties.
Those with high marginal tax rates that wish to invest for the long-term but are unwilling or unable to invest in the super system would also benefit from a tax paid investment at the end of the 10 year period.
Most investment bonds these days offer a reasonably wide range of investment options that should enable a satisfactory, if not perfect, investment portfolio in line with the goals and risk appetite of the investor.
In addition, the investment bond can be used as an estate planning tool. The investment bonds are subject to the regulations associated with the insurance act, and, as such the proceeds of an investment bond do not form part of the estate.
Therefore, an investment bond can be used to ensure that a desired beneficiary inherits an asset. This can be useful in circumstances where the intended beneficiary may not be a close relative or it is likely that the estate will be contested. Furthermore, conditions can be placed on the inheritance. This is useful if the beneficiary is a minor or perhaps not responsible with money. It is possible to set conditions on how the money will be received.
There are also bonds especially designed for educational purposes that allow for funds to be withdrawn from the bond to cover costs associated with a child’s education without losing the tax benefits.
The investment bond is another investment vehicle that in some circumstances may be very effective for helping you achieve your future financial goals.
Alex McKenzie, Future Financial Services
Alex McKenzie is a financial planner, and the owner of Future Final Services in Penrith. He is a graduate of Western Sydney University.