Investment bonds are a managed investment portfolio which is taxed internally and has a beneficiary or beneficiaries that may be nominated in the event the life insured dies during the investment term.

Investment bonds offer a tax effective investment that can be used to build wealth, without increasing an investor’s personal tax liability.

Investment bonds are considered to be a tax-effective structure outside of superannuation, with the bond being known as a ‘tax-paid’ investment, whereby the tax on earnings is paid by the product issuer at the company rate of 30 per cent.

Investment bonds are a simple, flexible, and tax effective way of investing for some people towards a longer-term goal, such as for their children’s or grandchildren’s education.

Tax advantages of an investment bond

The tax benefits of an investment bond for some people occur due to the ongoing earnings being taxed within the investment bond, at a maximum tax rate of 30 per cent (which may be less than a person’s individual marginal rate).

These earnings are not included as part of an investor’s personal assessable income, irrespective of their marginal tax rate.

There is no personal capital gains tax upon withdrawal or when switching between investment options, with all earnings and gains being paid by the bond issuer at the company tax rate.

Features of an investment bond

There are a few providers that offer investment bonds, with the main product features being:

• Tax is paid by the bond issuer while invested, so there is no personal assessable income
• When a policy has been held for 10 years or more, withdrawals are non-assessable for income tax purposes
• Low minimum investment amounts available, allowing individuals to establish a regular savings plan for a particular goal
• Ability to make a one-off lump sum or a regular savings plan
• Accessible at any time – no need to meet a condition of release, unlike superannuation
• You can choose from a menu of investment options including share funds, and have the flexibility to change investments within the portfolio at any time
• Flexibility to switch between asset classes and risk profiles
• Some bonds have a limit on the maximum additional investment that can be made each year. Often, the maximum you can invest in any one year is 125 per cent of your investment the previous year
• Can be used as part as part of estate planning.

Who is an investment bond suitable for?

Investment bonds may be suitable for people with a long-term investment plan, and for parents or grandparents looking to invest on behalf of their next generation.

Investment bonds could also be suitable for:

• Investors with financial objectives to improve entitlements and reduce tax
• Investors with young children or blended families
• Investors who have contributed as much concessional contributions to superannuation as possible
• Investors with retirement planning concerns
• Investors looking for certainty in estate planning.

Want to know more about investment bonds?

For those looking to expand their investment portfolio, investment bonds offer choice and flexibility for building wealth, estate planning, or as an alternative to complement your superannuation.

If you think that an investment bond might be worthwhile considering, then LDB’s financial planners can help discuss whether this may be suitable for you and your circumstances.

To find out more, call us on (03) 9875 2900 or fill out the contact form below.