Investment bonds, also known as insurance bonds, have made a recent resurgence as a financial planning tool.
This resurgence has come after a period where investment bonds fell out of favour, due to:
a combination of legislative changes that improved the effectiveness of other products in meeting client financial needs and goals, and
investors having internal structures that were expensive, often with inbuilt ‘hidden’ commissions, and, in many cases, with limited and inflexible investment options.
What is an investment bond?
Broadly speaking, an investment bond is a type of pooled investment where the earnings are taxed at the product issuer’s tax rate (being the company tax rate of 30 per cent). Because investment bonds fall under the Life Insurance Act 1995, as opposed to shares and managed funds that fall under the Corporations Act 2001, investment bonds have some unique characteristics. The bond will offer a range of investment options, so that you can invest as aggressively or conservatively as you like.
Core uses for an investment bond
When thinking about financial planning, there are a number of uses for an investment bond that could be considered. These include:
- Reducing the tax rate for high income earners – all earnings are taxed at a maximum of 30 per cent, rather than at the highest marginal rate of 47 per cent.
- Complementary to or providing an alternative to super – where the caps on super contributions are problematic investment bonds have no limits on the amounts invested or any restrictions on accessing funds.
- Reducing distributable income within a trust – by reducing or eliminating distributable income within a discretionary or family trust.
- Meeting the costs of future generations – saving for future events for children/grandchildren.
- Helping to control wealth transfer – bypassing an estate or transfer at a time of your choosing.
- Improving pension and aged-care entitlements – managing entitlements and reduce aged-care fees
- Providing creditor protection – an investor or investor’s spouse may receive creditor protection in the event of bankruptcy (as long as intent wasn’t to avoid creditors).
Why has their appeal grown recently?
Many factors have contributed to the resurgence in investment bonds recently, but two main reasons are linked to superannuation and estate planning.
Numerous legislative changes to superannuation rules, have increased the complexity and created investor uncertainty relating to long term saving. As such, investors have looked for alternatives to save for retirement and beyond, especially since 1 July 2017 when legislative changes reduced the ability to make superannuation contributions and placed a cap on the amount that could be retained in a tax free income product, such as an account based pension. Additionally, the restrictions that exist on superannuation access removes the ability for an investor to self-fund using super at a time that they may need. An investment bond can be used as a complementary investment to, or replacement of, superannuation.
More than $3.5 trillion is estimated will change hands in Australia over the next 10 to 20 years as part of the largest intergenerational wealth transfer in history. Investment bonds are a highly attractive and simple proposition when looking to transfer wealth to the next generation. They provide certainty to an investor that the funds will be delivered to the intended recipients, free of the potential of a challenge to the estate.
Other benefits of an investment bond
- Easy access – access to funds is not restricted, unlike superannuation.
- Transferrable – easily transferable to another party on death or at a future date, unlike superannuation, where restrictions and caps apply.
- Simple tax reporting – tax assessable income is only required to be reported if a withdrawal is made within the first 10 years of investment.
- Managing Adjustable Taxable Income (ATI) – as income is not distributed, an investment bond can also help with ATI which is used to determine access to government benefits such as the Commonwealth Seniors Healthcare Card.
- Managing income distributions from private trusts – as a non-distributing investment, an investment bond does not generate assessable income for a trust that holds the investment, and therefore does not require that earnings generated by the investment need to be distributed (typical of trusts). This ultimately reduces assessable income in the hands of the trust and the flow on effect to trust beneficiaries.
Like so many products used with financial planning, no one product provides a comprehensive solution. Insurance bonds must be considered as part of an overall financial plan and used to underpin a strategy which aims to achieve a specific goal for a client.
To explore how investment bonds might fit into your investment portfolio, contact your local Bentleys advisor.
Simon is an Authorised Representative (Number 255335) of McLean Delmo Bentleys Financial Services (ABN 39 073 019 815, AFSL 000245558).
Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.