Investment Bonds – What are they? Why should they be part of your wealth portfolio?

Investment Bonds – What are they? Why should they be part of your wealth portfolio?

The short of it

An investment bond is a tax effective investment that can be used to build wealth, without increasing an investor’s personal tax liability. They may be suitable for:

  • High income earners looking for investments outside of super.
  • Parents and grandparents saving for their child’s future.
  • Business owners looking to protect assets.
  • Bonds are very simple ‘set and forget’ style investments and can be set up for as little as $1,000.

If you earn more than $37,000, they are the most tax effective investment, after super, but without the restriction of having your funds locked away until retirement.

Another great benefit is that returns from the investment do not need to be included in personal income tax returns, while invested and if they are held for ten years. Holding the investment for ten years is the best option of tax benefits but not compulsory.

Take advantage of compounding interest

Compound interest is the interest you receive on the money you initially deposited (principal) together with the interest you’ve already earned. You get interest on your interest! This is a very effective strategy over long term investments such as bonds.

“Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” – Albert Einstein

What are Investment Bonds invested in?

An investment bond works similarly to superannuation or a managed fund portfolio, where your money is invested in a range of asset classes, such as cash, shares and property – all managed by professional fund managers.

What can an investment bond be used for?

Investment bonds can be used for a wide range of investment strategies:

  • Plan to retire early – Fund your retirement prior to having access to superannuation.
  • Alternative to superannuation – To create tax effective income streams outside superannuation.
  • Home loan deposit funding – The average age of first home buyer is 38. This means that it is more important than ever to start saving early for a home loan deposit.
  • Education fund – Save for your child’s education.
  • To invest inheritances, windfalls and lottery winnings effectively.
  • Gifting – Give your child an investment portfolio at a nominated age i.e. 21
  • Estate planning – Managing superannuation death benefits for non-dependant beneficiaries, simplified estate planning, or protection from creditors in event of bankruptcy.
  • Asset protection – protect funds for vulnerable or minor beneficiaries. 

What are the tax benefits? 

The maximum tax rate you will pay is 30%, however this tax rate can be reduced depending on the asset class you invest in, due to add backs such as franking credits – making this a very attractive savings tool for high income earners. The average tax paid by a selection of Australian equity investment options over the 4 financial years to 30 June 2018 was 11.4% (based on actual assessable income and actual tax paid by the options).

There is no need to provide a TFN and no annual tax reporting is required unless a withdrawal is made within the first 10 years, making this a simple investment choice. 

After 10 years, your investment earnings won’t attract any personal tax which is known as the 10 year advantage. Like Super, this is a tax paid structure therefore you have nothing to declare on your annual tax return which means minimal administration requirements. 

Complete control over your investment

  • You retain ownership and complete control of the investment bond unless it is transferred to your nominated beneficiary.
  • You can transfer ownership of the bond to any legal entity without triggering a tax event.
  • A bond is a non-estate asset, when a beneficiary nomination is made, therefore your beneficiary is guaranteed to receive the money you leave behind. It can also be used in conjunction with or as an alternative to a will or testamentary trust, reducing delays and costs in distributing your estate. 
  • Investment bonds can be structured to be creditor protected, so in the event of bankruptcy, you will have the funds from a bond to fall back on. 

Start small and start early

A little can go a long way. A small investment started early enough and left alone to grow, can potentially achieve far more through the power of compounding returns than a larger initial investment over a shorter time frame later in life.

Contact us for more information on how investment bonds can fit into your wealth portfolio.

Lane Financial