In investing, I always like finding a hidden gem – a product or structure not everyone knows about.
Most high net worth investors are already familiar with superannuation, its contribution rules and its tax benefits. But once you have maxed out super, what comes next?
A family trust? A bucket company?
There is another, lesser-known option worth understanding: investment bonds.
An investment bond (sometimes called an insurance bond) is a long term investment structure that combines elements of a managed fund with a life insurance policy. For some investors, it can be a very useful tax effective wealth building tool.
Investment bonds are tax-paid investments, meaning tax is paid within the bond itself at a rate of 30%.
That is not as attractive as superannuation, but for many high income earners it can still be significantly better than paying tax at the top marginal rate.
If the bond is held for 10 years, withdrawals are generally tax free, provided the rules have been followed.
Unlike super, investment bonds are not locked away until retirement.
You can access your money at any time.
If you withdraw within the first 10 years, the tax treatment changes, but there may still be some benefit through a 30% tax offset depending on your circumstances.
One of the things I find particularly useful about investment bonds is that earnings are retained within the bond rather than distributed each year.
That can make them helpful in family trust or discretionary trust structures, particularly where annual distributions are not ideal.
Because tax is paid internally and earnings are retained, there is generally no annual tax reporting for the investor.
That can be very appealing for high net worth families who already have enough complexity in their financial lives.
Investment bonds can also be useful from an estate planning perspective.
They may allow assets to be passed directly to nominated beneficiaries outside of the will, which can help simplify transfers and in some cases avoid probate.
I have seen them used quite effectively in family situations where there is a desire to direct capital in a very specific way.
Like superannuation, investment bonds can also offer a degree of creditor protection, provided they have not been put in place to defeat creditors.
That can make them particularly relevant for business owners and families with higher risk exposure.
After your initial contribution, you can contribute up to 125% of the previous year’s contribution each year without resetting the tax benefits.
If you breach this rule, the 10-year period resets.
For maximum tax effectiveness, investment bonds generally need to be held for at least 10 years.
Investment bonds do not replace superannuation.
But for high net worth investors who have already maxed out super, they can be a very useful additional tool.
And unlike super, they tend to sit a little more quietly in the background, away from the constant political attention and rule changes.
They are not perfect, and they are certainly not right for everyone.
But they are one of those structures that are well worth understanding.
Because sometimes the most useful tools in wealth management are the ones that do not get talked about enough.
If you are curious whether an investment bond could be useful in your circumstances, you are very welcome to get in touch for a conversation here.
Kind regards,
Shelley Marsh
Outsourced Chief Investment Officer (OCIO) & Founder
Wealth Differently
General Advice Warning: Wealth Differently holds an Australian Financial Services licence to provide services to wholesale clients only. The information on this website is only for persons who are wholesale clients as per s761G of the Corporations Act. The information includes general advice which does not consider your particular circumstances and you should seek advice from Wealth Differently who can consider if the strategies and products are right for you. You should also understand that past performance is often not a reliable indicator of future performance and should not be solely relied upon to make investment decisions.
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