In the world of investing, I love it when I find a hidden gem—a product or investment not everyone knows about.  Most high-net-worth investors (HNW) are well-versed in superannuation, its contribution rules, and the tax benefits. But once you’ve maximised your superannuation, what’s your next best tax-effective option? A family trust? A bucket company? There’s another, lesser-known option: an investment bond.

An investment bond (also called an insurance bond) is a long-term investment vehicle that combines the benefits of a managed fund with a life insurance policy. It’s particularly appealing to investors seeking tax-efficient long-term wealth-building strategies. Here’s why it could be ideal for high-net-worth investors:

1. Tax Effectiveness: Investment bonds are “tax-paid” investments, meaning tax is paid at a rate of 30% within the bond itself. Whilst not as good as superannuation, it is significantly better than the 47% marginal tax rate (including Medicare levy) most high-net-worth investors face. Once the bond is held for 10 years, withdrawals are tax-free if no withdrawals were made during the bond’s life.
2. Access to Your Funds: Unlike superannuation, you can access your investment anytime. If withdrawals are made within the first 10 years, you may still benefit from a 30% tax offset. However, any withdrawal restarts the 10-year tax advantage period (explained further below).
3. Trust-Friendly: Unlike other investments (e.g., managed funds or shares), earnings within an investment bond are retained, not distributed. This feature makes it useful in trust structures (like private, family, or discretionary trusts), as it eliminates the need for the trust to distribute income.
4. No Annual Tax Reporting: Since tax is paid and earnings are retained within the bond, you don’t need to include its earnings in your personal tax return each year. In fact, they don’t even require your tax file number (TFN). This simplifies tax reporting and reduces administrative burdens, particularly helpful for high-net-worth investors who have complex portfolios and structures.
5. Estate Planning Benefits: High-net-worth families can be complex, investment bonds can be used to ensure your wishes are followed after your death as they simplify wealth transfers by bypassing probate. I’ve seen clients use them to transfer assets directly to beneficiaries outside of their will, or even have grandparents use them to bypass their children and pass assets directly to their grandchildren. Investment bonds can support a variety of estate planning strategies, tailored to fit your specific circumstances.
6. Bankruptcy Protection: Like superannuation, investment bonds offer protection from creditors in the event of bankruptcy, as long as the intent isn’t to defraud creditors. This protection extends to both the bond itself and any proceeds received after bankruptcy, making it especially valuable for high-net-worth investors with high-risk business ventures.

There are, of course, important rules to be aware of which you need to read all the investment documentation to understand. However, here are two of the most important:

1. 125% Rule: Unlike superannuation, you can invest any amount in an investment bond. In each subsequent year, you can contribute up to 125% of the previous year’s contributions without resetting the 10-year tax advantage period. These additional contributions are treated (for tax purposes) as if they were made at the same time as your initial investment. If you breach the 125% rule, the 10-year advantage resets.
2. 10-Year Rule: For maximum tax efficiency, you should hold the investment bond for at least 10 years.

While investment bonds may not offer the same benefits as superannuation, as those with balances over $3 million have recently found out, the superannuation rules can change at any moment depending on the whim of the government of the day.  Superannuation is a large target for tax changes, but investment bonds are currently under the radar and don’t attract the same political attention.

Some may argue that the range of investments available in an investment bond is limited. While it’s true you can’t invest in anything you want, I find the selection is usually broad enough to suit a high-net-worth client’s overall strategy.

Of course, none of this is financial advice, and whether this is the right fit for you is entirely dependent on your circumstances. However, if you’re interested in exploring whether an investment bond could be a good fit for you, feel free to schedule a time to chat with me here.

Have a great week!

Kind regards,

Shelley Marsh
Outsourced Chief Investment Officer (OCIO) & Founder
Wealth Differently

General Advice Warning: This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. It does not represent and is not intended to be personal advice.  Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs.  We strongly suggest that you seek professional financial advice before acting.

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