Understanding the Essentials of Investment Bonds: Part 1

Investment bonds have gained a lot of popularity in the last few years with people looking for a tax-effective investment option.

There are huge tax advantages of investment bonds for people in every life stage – especially for higher-income earners. 

So what exactly is an investment bond?

An investment bond (also known as an insurance bond) is a combination of an investment portfolio and a life insurance policy. 

An investment bond is essentially a ‘tax paid’ investment.

This means the tax on investment earnings is paid by the bond issuer and the bond owners do not have to pay the tax themselves.

Investment bonds have been designed to be held for a minimum of 10 years in order to provide the maximum tax advantage. However, there is no requirement to hold the investment for that period, with access to funds available at any time.

After 10 years, withdrawals are tax-free. But if you choose to access your bond before the 10 years, there may be tax implications.

What can you use an investment bond for?

Investment bonds are used for many reasons, including investing in a child’s education, saving for other significant goals, and as an alternative superannuation investment opportunity.

For example, if you’ve surpassed your superannuation contribution limit or want to be able to access the money before retiring, this may be a good option for you.

Investment bonds also let you invest on behalf of a child (or grandchild) and then automatically transfer the investment ownership to that person at a date of your choosing. This feature of investment bonds allows parents and grandparents to tax-effectively save for big-ticket items for their kids and grandchildren – like education, a car, or house deposit.

Who are investment bonds suitable for?

Investment bonds can be a great tool for many individuals, families, or retirees. However, it’s important to note that these suggestions are only a guide. Be sure to consult with a financial adviser before making any decisions. 

Investment bonds may be suitable for:

• Higher-income earners: All investment bond earnings are taxed within the investment bond at a maximum rate of 30%, making this a tax-effective investment solution for those with a high income.
• People looking for an alternative to, or wanting to complement their superannuation investment: Investment bonds can be a tax-effective way to save for your retirement. Unlike superannuation, there are no restrictions such as contribution caps or age limits. You also have access to your money at any time which could be effective for an early retirement plan.
• People who want a regular income stream: Investment bonds have a regular withdrawal feature where you can set up a tax-effective regular income stream. This can be particularly useful for early retirees who don’t have access to their superannuation yet.
• Some Age Pension recipients and Aged Care residents: Investment bonds may assist with means-income tested age pension entitlements and could help to reduce aged care resident fees.
• People looking to qualify for other Government benefits: Depending on your personal financial situation, investment bonds may help you qualify for other Government benefits like the Commonwealth Seniors Health Card and Family Tax Benefits.

Before determining if an investment bond is appropriate for you, get the advice of an experienced financial advisor.

If you want to learn more about investment bonds or need help with investment bonds on the Gold Coast, Cambio Group’s financial planners can help. We help our clients make smart financial decisions that will benefit them and their families in the future.

Contact us today to book your complimentary, initial appointment with our Wealth Management advisors.

Want to know more? Check out Part 2 of our Investment Bond Series!

DISCLAIMER: The information (including taxation) in this website does not consider your personal circumstances and is of a general nature only – unless otherwise stated. You should not act on the information provided without first obtaining professional advice specific to your circumstances.