Investment Bonds: Capital Gains Free Investments for the long term

What is an Investment bond?

Investment bonds (sometimes referred to as insurance bonds) are a long-term investment vehicle that can offer a tax effective way of accumulating wealth for some investors.

An investment bond is a type of life insurance investment contract, which means there will be a bond owner (investor) and a life insured (which can also be the bond owner).

Similar to superannuation, beneficiaries can also be nominated (including entities such as companies) to receive the bond’s proceeds in the event of the death of the life insured.

The following general information describes the key advantages of investment bonds and highlights some important factors you should be aware of when considering our advice.

So how are they Capital Gains Free?

Investment bonds are tax-paid investments. That is, the issuer pays the tax on the earnings at a maximum rate of 30%. Tax is paid ‘inside’ the bond, like superannuation and earnings are not required to be included in your personal tax return.

If you earn more than $37,000 a you can invest at a lower tax rate within an Investment bond.

After holding your investment for 10-years, earnings won’t attract any personal tax liability - this is known as the ‘10-year advantage’.

Importantly, unlike superannuation, you have access to your investment at any time, including before 10-years. The 10-year period begins on the date you first establish your investment.

If you take any money out within 10-years of your initial investment date that amount will add onto your taxable earnings for the year. The amount of earnings that need to be included as part of your tax assessable earnings will depend on the size of the withdrawal and how long after your 10-year starting date the withdrawal is made.

The portion of earnings that would be included as assessable income is determined as follows:

  • 0-7 years – 100% included

  • 8th year – 2/3’s included

  • 9th year – 1/3 included

  • 10th + year – Not included as income.

Let’s say you invested $12,000 a year into an investment over 10 years – which grew to roughly $180,000

  • If that were held in your own name you sold it, you would pay tax on half of that investment (providing you’d held all of it 12 months) – adding $90,000 to your income for the year

  • In the investment bond, after 10 years none of it would be taxable!

Whats the catch?

The 125% Rule

In each subsequent investment year, you can only make additional contributions of up to 125% of the previous investment year’s total without re-setting the 10-year period.

  • If you invested $10,000 in the first year, you could put up to $12,500 in the second

  • If you only out $1,000 in the second year, you could only put $1,250 in the 3rd

  • If you put NO money into the account in the 3rd year, you could not add in any more money without resetting the 10 year period.

So who can these work well for?

An investment bond may be the right vehicle for you if you are

  • Looking at a long term 10+ year investment, who earn more than $37,000 a year.

  • Saving for kids education costs – which are 10 years away.

  • Putting money aside for grandkids, and managin your estate.

  • Want to invest as an alternative to paying extra on the mortgage (if the returns are greater than your mortgage rate, after 10 years you can access the money tax free and pay off the loan!)

  • Saving the maximum into your super and, and want another way to reduce tax on your investments.

Be careful of

  • The 125% rule – If you stop saving into it, you can’t save any more.

  • Commitment – although the money can be accessed at any time, the real advantage comes about after 10 years!

  • Some products that offer these can be quite high in fees, which can eat into your returns.

If you think an insurance bond may be for you, or you want more information, get in touch!

DISCLAIMER: The information contained within our website is of a general nature only and has been provided without taking account of your objectives, financial situation or needs.

Because of this, you should consider, with or without the assistance of a financial adviser, whether the information is appropriate in light of your particular needs and circumstances.

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