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If the opportunity arises, who wouldn’t love to go back in time and invest in the stock market 25 years ago? If you had, would compound market returns (10% on average) have turned a measly $ 10,000 to over $ 120,569 today?
This is one of the reasons why, as parents, we feel the need to start investing early in our children. This way, they too can reap the benefits of compound returns and learn about the wonderful wealth-building machine that is the stock market.
This is where investment bonds come in.
What are investment bonds?
An investment bond, or insurance bond, is a product offered by an insurance company or a friendly company. The bond combines an investment fund and a life insurance policy into one product.
A few features make insurance bonds ideal for investing for children.
First, investments are taxed within the fund at a flat rate of 30%, separate from our own taxable income, making the product ideal for investors in a high tax bracket.
Second, the bond holder can nominate a beneficiary (anyone under the age of 25) to whom the investments will be transferred on a certain date or at a certain age. If held until “maturity”, the investment obligation will be acquired by the beneficiary without any tax consequences.
How to use investment bonds to invest
There are many insurance companies offering investment bonds, and all fund choices are different. However, as a general rule, the policyholder can choose between several funds managed both actively and passively, including from popular providers such as Avant-garde and Black rock.
Once the registration procedure and the choice of fund are completed, you must make a first contribution, starting from a few hundred euros, then set up monthly, quarterly or annual recurring contributions in the fund.
Funds can then be withdrawn after 10 years without any tax consequences, or at any time before that date with certain tax implications.
That sounds good. How much will it cost me?
There are a few different fees to be aware of.
The investment bond manager charges an annual management fee of between 0.3% and 2% depending on the assets under management.
The underlying fund provider – for example, Vanguard – charges a fee based on the fund selection plus certain transaction fees, each time additional fund shares are purchased.
Some important rules to remember
Investment bonds are only “tax exempt” if no withdrawals are made during the first 10 year period. This is called the 10-year rule.
There is another rule known as the 125% contribution rule, which requires that additional contributions not exceed 125% of the amount contributed in the previous year. This is put in place to prevent tax evasion.
I believe that the gift of stocks is one of the most powerful and rewarding gifts we can give to our children. As parents, investment bonds provide us with a good combination of ease of use, flexibility and tax efficiency.