For better or for worse, the retirement pension is still viewed as the ultimate investment vehicle for achieving long-term wealth goals. Yet in the decade-long rush to take advantage of generous pension tax breaks, many attractive investment products with similar tax breaks have been largely overlooked. Let’s take a look at a once-often-overlooked, but increasingly sought-after great alternative: investment bonds.
Few in the wealth management arena would deny that retirement remains the gold standard for tax-efficient wealth accumulation. Nonetheless, the super has some obvious drawbacks, including its strict release conditions.
As investors demand ever greater flexibility and access to heritage assets, investment bonds are asserting themselves as a viable complement, or even a flexible alternative, to more rigidly structured pension funds.
Investment bonds (also known as insurance bonds) are used in a range of investment strategies, from tax management and estate planning to general goals of wealth accumulation and building a nest egg. retirement.
Yet, as wealth advisers take stock of their clients’ pre- and post-retirement needs, the question remains: Can investment bonds offer an ideal tax structure beyond the traditional pension fund?
Investment bonds vs Super
Simply put, investment bonds are a tax-free investment vehicle giving investors unrestricted access to funds for the duration of their investment.
Due to their unique structure, any tax generated on investment income is paid by the bond issuer at the corporate tax rate (currently capped at 30 percent). If the bond is held for 10 years or more, investors are not subject to tax on investment income and as such are not required to report investment income on their personal income tax return. as long as the funds remain invested.
If, however, a withdrawal is made during the first 10 years, the gains must be declared for personal income tax (investors will nevertheless benefit from a reduction of 30% on the tax already paid by the issuer of the obligation).
One of the notable advantages of investment bonds is that they are not exposed to legislative changes that affect the value, affordability and tax structure of retirement investments.
For example, a proposal by the Financial Services Council to increase the pension retention age from 60 to 62, thereby limiting access to funds for two more years, could negatively impact the retirement plans of thousands. of Australian workers. Investment bonds do not contain such restrictions.
The 125% rule
In order to maximize the return on investments, investors have the right to make regular contributions to their fund. However, in order to benefit from the 10-year investment period, a cap is placed on the maximum value of annual contributions before a restart from the original investment date is triggered. This is called the “125 percent rule”.
As the name suggests, the “125% rule” allows investors to make additional contributions to the fund as long as they do not exceed 1.25 times the value of the deposit from the previous year.
For example, with an initial investment of $ 10,000, investors will then be entitled to a maximum contribution of $ 12,500 the following year and $ 15,625 the following year.
This is because if no deposit is made in a given year of the investment term, investors will no longer be able to add to their investment without triggering a restart of the 10-year tax period of the investment. obligation.
Who benefits from investment bonds?
Offering unique tax incentives, unlimited access to funds, and a variety of asset class choices, investment bonds offer countless benefits to everyday investors.
Investment bonds present an ideal investment vehicle for individuals:
- looking for a tax-advantaged wealth building strategy
Particularly useful for those who save for a specific purpose, such as future spending on early childhood education. For investors with an effective tax rate above 30 percent, insurance bonds provide a tax-efficient and stable vehicle for asset growth. Also ideal for investors who have reached the limit of their pension contributions.
- prepare or retire
Particularly well suited for those who need more choice as to their retirement date. With proposals to increase the super holding age to 70, investment bonds offer a simple, hassle-free alternative that is unaffected by government changes to super. In addition, with strict eligibility limits for work tests for people aged 65 to 74 (a minimum of 40 hours over 30 consecutive days), contribution limits on super deposits may prove impractical for needs after retirement.
- planning an estate / trusts and supporting your family
Investment bonds provide a stable asset base for estate planning. Investors can nominate beneficiaries (including charities), the proceeds of which are paid directly and immediately to the heirs, free of income tax, regardless of the investment period.
- wishing to invest on behalf of their children / dependents.
Tax rates for dependents under 18 remain prohibitive (currently 45 percent). Investment bonds can effectively bypass this punitive tax regime and provide a consistent rate of return for young investors.
- business succession planning
Investment bonds give business owners certainty when transitioning their business interests. The transfer of ownership of bonds is smooth, and in the event of bankruptcy, the investment proceeds are usually protected from creditors.
A great alternative
Avoiding unpredictable legislative changes and the access restrictions generally imposed on super fund holders, investment bonds represent the ideal and tax-efficient complement to retirement pensions.
With a diversity of investment products, each offering a unique set of characteristics, asset class balances and fee structures, it is essential that your clients receive the right advice to ensure their wealth goals. individuals are reached.
IOOF Helping Australians secure their financial future since 1846 and providing solutions to help clients achieve their financial goals.
IOOF WealthBuilder is one of the leading investment bonds available today. Not only does it offer investors a true investment solution for their tax management, estate planning, savings and investment needs, but it offers a wide range of investment options and product features. .
For more information on investment bonds, visit the IOOF website (www.ioof.com.au/wealthbuilder) or to order an IOOF WealthBuilder Strategy Pack click here.