When Super is Not an Option – The Return of Investment Bonds

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For better or worse, superannuation is still held as the supreme investment vehicle for realising long-term wealth goals. Yet in the decade-long scramble to cash in on generous superannuation tax breaks, many worthwhile investment products with similar tax concessions have been largely overlooked. We take a look at a once oft-forgotten, but increasingly sought after super alternative: investment bonds.

Few in the wealth management trade would deny that superannuation remains the gold standard for tax-effective wealth accumulation. Nevertheless, there are evident drawbacks to super, not least of which are its strict conditions of release.

With investors demanding ever-greater flexibility from – and access to – wealth assets, investment bonds are staking their claim as a viable complement, and indeed flexible alternative, to more rigidly structured superannuation funds.

Investment bonds (also known as insurance bonds) are used across a range of investment strategies, from tax management and estate planning, to general wealth accumulation goals and building retirement nest eggs.

Yet as wealth advisors take stock of their clients’ pre- and post-retirement needs, the question remains: can investment bonds offer an ideal tax structure beyond the traditional superannuation fund?

Investment Bonds vs. Super

Simply defined, investment bonds are a tax-paid investment vehicle giving investors unrestricted access to funds throughout the term of their investment.

Owing to their unique structure, any tax generated on investment earnings is paid for by the bond issuer at the company tax rate (currently capped at 30 per cent). If the bond is held for 10 years or more, investors are not liable for tax on investment earnings and, as such, are not obligated to declare investment earnings on their personal income tax return while funds remain invested.

If, however, a withdrawal is made during the first 10 years, earnings must be declared on personal income tax (investors will, nonetheless, receive a 30 per cent rebate for tax already paid by the bond issuer).

One of the notable advantages of investment bonds is that they are not exposed to legislative changes that affect the value, accessibility, and tax structure of superannuation investments. 

For instance, a proposal by the Financial Services Council to increase the superannuation preservation age from 60 to 62, thereby limiting fund access for two additional years, could adversely affect the retirement plans of thousands of working Australians. Investment bonds carry no such restrictions.

The 125% Rule

To maximise investment returns, investors are entitled to make regular contributions to their fund. However, in order to benefit from the 10-year investment term, a cap is placed on the maximum value of annual contributions before a restart of the original investment date is triggered. This is known as the ‘125 per cent rule’.

As its name implies, the ‘125 per cent rule’ allows investors to make additional contributions to the fund providing it does not exceed 1.25 times the value of the previous year’s deposit. 

For example, with an initial $10,000 investment, investors will then be entitled to a maximum contribution of $12,500 in the following year, and $15,625 in the year after.

Effectively, if no deposit is made in any given year of the investment term, investors will no longer be able to add to their investment without triggering a restart of the bond’s 10-year tax period.

Who Benefits from Investment Bonds?

Offering unique tax incentives, unrestricted fund access, and a diversity of choice in asset classes, investment bonds offer countless benefits for everyday investors.

Investment bonds present an ideal investment vehicle for individuals:

  • seeking a tax-effective wealth accumulation strategy
    Particularly useful for those saving for a specific purpose, such as future childhood education expenses. For investors with an effective tax rate greater than 30 per cent, insurance bonds provide a tax-efficient and stable vehicle for asset growth. Also ideal for investors who have maxed out their superannuation contribution limits.
  • preparing for or in retirement
    Particularly well-suited for those requiring greater choice over their retirement date. With proposals to increase the super preservation age to 70, investment bonds offer a simple, fuss-free alternative that is unaffected by government changes to super. Moreover, with strict work test eligibility limits for those between the ages of 65 and 74 (a minimum of 40 hours over 30 consecutive days), contribution caps on super deposits can prove impractical for post-retirement needs.
  • planning estate/trusts, and providing for your family
    Investment bonds provide a stable asset base for estate planning. Investors can nominate beneficiaries (including charities), with proceeds paid directly and immediately to heirs, free of personal income tax, regardless of the investment period.
  • wishing to invest on behalf of their children/dependants. 
    Income tax rates for dependents under-18s remain prohibitively high (currently 45 per cent). Investment bonds can effectively sidestep this punitive tax regime and ensure a consistent rate of return for young investors.
  • planning for business succession
    Investment bonds give business owners certainty when transitioning their commercial interests. Transfer of bond ownership is seamless and, in the event of bankruptcy, proceeds from the investment are generally protected from creditors.

A Super Alternative

Avoiding the unpredictable legislative changes and access restrictions typically imposed on super fund holders, investment bonds present the ideal tax-efficient complement to superannuation.

With a diversity of investment products, each offering a unique set of features, asset class balances, and fee structures, it is vital that your clients receive the right advice to ensure their individual wealth goals are met. 

IOOF has been helping Australians secure their financial future since 1846 and have been providing solutions to help clients achieve their financial goals. 

IOOF WealthBuilder is one of the leading investment bonds available today. Not only does it provide investors with a genuine investment solution for their tax management, estate planning, savings and investment needs, but it boasts a great range of investment options and product features.

For further information on investment bonds, visit IOOF’s website (www.ioof.com.au/wealthbuilder) or to order an IOOF WealthBuilder strategy pack click here.

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