While many financial products have come and gone, investment bonds have certainly stood the test of time. They first came onto the market in the early 1980’s and were very popular as a way to invest in a tax effective environment. With the advent of superannuation and other complex structures, investors started to favour alternate investments. But today, with the introduction of superannuation caps, work tests and the need for accessibility to funds, investment bonds are more popular than ever.
The short and long-term approach to investment bonds
Simply put, an investment bond is a tax paid investment. This means that the tax on investment earnings is paid by the bond issuer at the current company tax rate of 30 per cent. After ten years from the start date, the investment is free of personal income tax in the hands of the investor. There is also no capital gains tax upon realisation or when switching between underlying investment options.
But investors don’t have to worry about locking the investment away for ten years either. Without a doubt, one of the biggest misconceptions about investment bonds is that they either only have a ten year life or need to be invested for at least ten years. This can be misleading as one of the best features of an investment bond is that not only is it tax effective but it’s accessible, at any stage. However, you should note to your investor clients that different tax considerations, including tax offsets, do apply to investments withdrawn before the end of the ten year period.
Why your clients should consider an investment bond
Not only is an investment bond tax effective, but it’s simple, flexible and convenient. Investors are not required to include it in their tax returns while invested or when withdrawn after ten years. This makes it a particularly good option for those wanting to invest for a particular event such as for investors saving for their children’s wedding or education expenses, a lavish future holiday or a big birthday bash.
In addition to investing for a particular event, one of the greatest features about investment bonds is that they can be used for a wide range of strategies. These include not only tax management but wealth accumulation savings and preparation for home care arrangements. For those concerned with estate planning, the bond is particularly unique as it allows investors to create certainty with respect to their wishes. Investors are able to nominate beneficiaries who can receive benefits directly and free of personal income tax. Loved ones are looked after and proceeds are not held up by estate challenges.
Over the last twenty years, the investment bond itself hasn’t really changed, but the environment around it has. We believe that today’s financial landscape creates more strategic opportunities for the use of an investment bond than ever before.
Sue Herrald has over 26 years’ experience in financial services and began with IOOF as a dedicated financial planner and head of the Private Client division. She is now the IOOF WealthBuilder investment specialist, dedicated to helping financial advisers use investment bonds to fulfill a number of financial planning strategy needs.
