Investment bonds (also known as insurance bonds) are sometimes seen as an old-fashioned, inflexible product that is no longer relevant in today’s investment world.
However, their attractive tax regime and distinct estate planning features mean they continue to have a useful role to play in investor portfolios, and can be a particularly valuable tool in certain strategies including income streaming, estate planning, and access to government benefits.
Some of the common myths that still prevail about investment bonds include:
Investment bonds are ‘old hat’
A number of the investment bonds now available have been modernised to better suit the needs of today’s investors.
For example, new generation investment bonds are flexible investment vehicles that offer a wide range of investment choices to suit investors’ individual needs.
Investors can choose to invest in growth options in a range of equity fund offerings, or take a more conservative approach through fixed interest investments. For example, at Lifeplan, we offer 38 investment options from leading Australian and international fund managers across all asset classes, and are fully FOFA compliant.
Investors will be locked in for 10 years
Funds can be withdrawn from an investment bond at any time. The reason a 10 year timeframe is recommended is that after this time period; withdrawals of income will not be assessed for income tax. Most importantly, there are no restrictions on withdrawing funds within the first 10 years of investment if investors need access to their funds.
Investment bonds aren’t as tax effective as they used to be
For some investors, investment bonds are a highly tax effective option – in some cases, second only to superannuation.
As mentioned above, if the investment bond is held for 10 years, there is no tax payable on withdrawals after this time. Even during the first 10 years, the tax rate on investment income is capped at 30 per cent, and there is no capital gains tax liability.
Investment bonds can also be used to help reduce an investor’s taxable income, which may enable them to claim benefits such as the Senior Australian Health Care Card or the Low Income Rebate.
Investment bonds don’t pay income
It’s true that if there are no withdrawals from an investment bond then there is no taxable income to the investor, but that doesn’t mean the investment bond can’t be structured to pay an income stream.
Investors can create an annuity-type, tax-effective income stream from their investment bond with complete flexibility over the amount and frequency paid. This can be useful to a number of investors who need a simple and tax effective income stream but either cannot access super or are restricted in the amounts they can put into super.
Investment bonds are governed by a Will
Investment bonds can be a useful estate planning tool because, if set up correctly, they should fall outside the scope of a Will and can therefore be directed to a beneficiary separately from the rest of the estate. This offers a number of benefits:
Beneficiaries don’t need to wait for probate of the estate and can therefore access the income or the lump sum immediately, which can be very useful to ensure continuity of funds for the family
In addition, investment bonds cannot be included in any claims on the estate, for example a challenge by another family member, as long as they have been established correctly
Some have unique features that can be set up to provide either income (for example, to minors or dependents) or a lump sum, whichever is most appropriate for individual circumstances.
Another consideration for financial advisers is that this approach gives them contact with the ‘next generation’ of potential investors, which can assist in their own business development activities.
This article was written by head of Lifeplan Funds Management, Matt Walsh.