A guide to building investment portfolios, understanding asset classes, diversification, value…
Accumulate wealth using tax-effective investment bonds to pay for expenses like child education or retirement.
Investment bonds (also know as “insurance bonds”) are a financial product issued by life insurance companies. Insurance bonds have features similar to managed funds integrated with a personal life insurance policy. Investment bonds can be a tax effective way to invest your money for the long-term. It is important to understand the costs, taxes and contribution restrictions of insurance bonds.
Dumont Wealth are experienced investment advisers with a specialisation in insurance/investment/education bonds. Save for future child education expenses, a deposit on a first home or a future investment property in a tax effective way. Investment bonds are tax effective investment vehicles with unique features and rules that can deliver a significant advantage to you over traditional investment ownership.
Commencing a strategy ahead of time can have significant compounding effects and can impact the achievement of your goals. Partner with us to help you. We have a variety of solutions and investment strategies that are tailored to the desired outcome and future funding required to pay for expenses. Alternatively, use this vehicle to have tax effective lump sum investments for the future.
Investment bonds serve many purposes such as:
There are three core parties involved in an investment bond:
Some bonds may include fourth party, being a nominated beneficiary. The bond owner may nominate a beneficiary to receive the bond proceeds in the event of the death of the life insured.
Where a bond is issued on the life of a child, and its ownership is to vest in the name of the child at a future date, the bond is subject to Child Advancement Conditions. The owner of the bond may nominate an age, up to 25, at which the ownership of the bond will transfer to the child. This can help you to ensure that the funds are not mis appropriated by a child that may not be of sound maturity in their teenage years.
Insurance bonds are ‘tax paid’ investments, which means that earnings are taxed at a corporate tax rate through the hands of the life insurance company, which is typically at a rate of 30%. However, when considering deductions, offsets and credits, the actual tax rate of the investment bond can be much lower than 30%.
Given the tax rate can be lower than 30%, this provides a good opportunity for high income and high net worth individuals to make tax effective investments. An investment bond is designed to ideally be held for more than 10 years to obtain significant tax advantages.
After a full 10 years the returns on your investment (i.e., the capital growth), including additional contributions that meet the 125% rule, will be tax free. Investment bonds can also be useful for shorter durations given the inherent tax efficiencies at 30% tax rates. During this period, you can still access the investments and make withdrawals – find out more below!
While investment bonds are often described as a ‘single premium’ or lump sum investment, many investment bonds accept both regular and irregular additional investments. Provided the amount invested in any one year – based on the anniversary of the bond commencing – does not exceed the previous year’s investment by more than 125%, it will be considered part of the initial investment.
If your contributions exceed 125% of the previous years’ investment, the 10 year period will reset. If you do not make a contribution in any one year, a contribution in following years will reset the 10 year rule.
If you withdraw money before 10 years, you will report this as taxable and assessable income with a 3o% tax offset to compensate for the tax already paid by the life insurance company. Where an investor’s personal tax rate is less than 30%, any unused portion of the tax offset can be used to reduce tax payable on other income in the same financial year.
If you make a withdrawal within the first 10 years, the rate at which earnings in the investment bond are taxed will depend on when you make the withdrawal.
This tax treatment is an excellent incentive for long-term investors who are making decisions for their retirement or next generation. It is a tax effective method for high income earners to accumulate money outside of superannuation, as well as build a tax effective nest egg to fund child expenses in the future.
The investment earnings are calculated by referencing a formula contained in the Australian Taxation Office’s Income Tax Ruling 2346.
The life insurance company issuing the investment bond may offer a range of investment options such as single asset funds i.e. cash, fixed interest, shares, property or a range of diversified options. Each option has different investment goals, timeframes, risk profiles and underlying assets. We can help you to choose the appropriate investment for your needs and goals.
The key risks are largely determined by the nature of the investment chosen. Risks to be aware of include:
It is important to seek advice from a qualified investment adviser to ensure that you have the appropriate strategy to accumulate wealth or protect wealth, towards your overall objectives.
If you want to discuss your options, we would love to hear from you.
Arrange a suitable time for you by using the ‘Book a meeting’ button. Alternatively, complete the ‘register interest’ form and we will contact you directly.
We have transparent and fair investment bond advice packages based on the solutions you need.
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