Investment bonds: benefits and key rules

I recently had the pleasure of sitting down with Grant Hackett to record a podcast on investment bonds. While many will know Grant from his time in the pool and as a multiple Olympic champion, Grant is now the CEO of Generation Life, a company that specialises in investment bonds.

What are investment bonds and what are they used for?

The use of investment bonds in your wealth creation will depend on what you want to own the investment bonds for. They are flexible wealth creation or wealth transfer tools.

Investment bonds are created under the life insurance act and are therefore an insurance product not an investment product. This creates some significant advantages for people that use them.

The main advantages of investment bonds are that they:

• are a tax effective investment structure, second only to superannuation. The maximum tax rate is 30%. Their tax effectiveness also increases depending on the investments option. The effective tax rate can be reduced to as low 15-20%;
• do not form part of your will. This ensures the beneficiary you want to receive the proceeds of the investment bond will receive it, with no risk of legal challenges;
• can be transferred without triggering a tax event, making them very flexible for wealth transfer when you are alive.

What are the benefits of investment bonds?

There are five broad areas where investment bonds are used for a strategic benefit. These are:

1. Alternative to superannuation

Investment bonds are the second most tax effective structure after superannuation. They may appeal to you as an alternative to super if:

• You are reaching the maximum $1.6m tax free limit
• You’re looking for alternatives to the constantly changing superannuation rules
• You want access to the money before you reach age 65

If these situations apply for you, investment bonds could be a good alternative.

2. Trust distributions

Clients who have trusts that do not want to distribute money from the trust because it will pass a tax liability to the beneficiary can consider investment bonds as an alternative. The money is invested in the trust instead of distributing. After ten years the investment bond can be wound up and distributed to beneficiaries as a tax paid distribution.

3. Helping children

The most common reason people look to investment bonds in this example is to help you save for a child’s education. The parent or grandparent can start the investment bond and make regular contributions to pay for the child’s education.

This strategy can extend to helping a child save for a deposit on a house by making regular investments to the bond over time and passing the proceeds to the child tax free when they are ready to buy.

4. Estate planning

Investment bonds are not passed through the will meaning that they cannot be challenged. This effectively gives you a binding nomination on your passing.

The person or organisation you want to receive the proceeds of the bond will receive the proceeds of the bond.

Further advantages for estate planning are that you can ‘rule from the grave’ in that you can determine at what age the beneficiary receives the proceeds, you can provide a regular income rather than a lump sum and you can limit access for life events.

5. Aged care & Centrelink benefits

The rules around these are difficult to write in brief, but investment bonds can used to increase access to the age pension and to assist in funding aged care places. These are complex and will vary from case to case.

If you are around the limits of the age pension or you or one of your family needs to access assisted age care, speak to your adviser to discuss how investment bonds might be used to improve your situation. 

What are some of the rules around investment bonds? 

Aside from these benefits, there are also a few key rules you need to know about before investing in investment bonds.

• You can invest as much as you like in the first year of the bond but can only invest 125% of the previous year’s contribution. Say you invest $20,000 in the first year, the maximum you can contribution in the second year is $25,000. If you contribute $25,000 in the second year, the maximum in the third year is $31,500 and so on.
• If you don’t make a contribution in any one year, you will not be able to contribute to future years. You will need to start a new investment bond for further contributions.
• You can access your funds at any time, but to get the full tax benefit from investment bonds, you need to hold the bonds for at least ten years.

Investment bonds can be a great tool for your wealth creation. The financial advisers at The Hopkins Group can advise on whether you will benefit from investment bonds as part of your financial plan. Contact an adviser at The Hopkins Group today to help you prepare your ideal future.

You can hear the full interview with Grant Hackett on the Talk Investment with Mark Wenzel podcast. You can listen to the podcast here or subscribe on your favourite podcasting player.