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How investment bonds can be as attractive as super

How investment bonds can be as attractive as super

Following Australian government changes on superannuation contributions, investment bonds are increasingly seen as an attractive alternative to super.

When it comes to saving for retirement, the most common option Australians use is a superannuation fund.

The government made various proposals in its May 2016 Federal Budget related to super contributions changes, and many of these have since been legislated.

These are some of the changes that have been enacted as law, with effect from 1 July 2017:

  1. Concessional or before-tax contributions: Current annual limits of $30,000 (and $35,000 for people aged 50 years and over) will be reduced to $25,000 across the board.
  2. Non-concessional or after-tax contributions: Current threshold of $180,000 a year will be cut to $100,000 a year. You are allowed to “bring forward” three years’ worth of contributions to a single year, contributing up to $300,000 in one year.
  3. $1.6m transfer balance cap on amounts moving into the tax-free retirement phase. This means you may have to withdraw any excess money if your personal pension assets exceed $1.6m, or additional tax may apply.
  4. The income threshold that will trigger the high income earners’ Division 293 tax on concessional contributions is lowered to $250,000 from $300,000.

With the proposed legislation to limit the dollar amount of concessional and non-concessional contributions now law, people in danger of reaching their annual cap may need to think about alternate investment options to super.

Against this backdrop, an investment bond, also referred to as an insurance bond is a smart way to achieve financial growth with a tax paid investment.

What is an investment bond?

An investment bond combines many of the features of a managed fund with the security and features of a life insurance policy. It allows you to select from a range of investment options in different asset classes, such as Australian and international shares, cash, fixed income and property.

Simple investing

The bond is a tax-paid investment. This means the tax on investment earnings is paid at the current company tax rate of 30%, rather than at the potential top marginal tax rate of 49%, which includes the Medicare levy and the Budget Repair Levy.

After your initial investment, investment bonds also allow you to increase your investment every subsequent year up to 125% of the previous year’s investment. After the tenth year if the 125% rule has been satisfied and no withdrawals have been made, funds within the investment bond can be withdrawn tax free, according to CommInsure head of annuities George Lytas.

No personal tax is payable in the investment bond once you’ve held it for 10 years. “Additionally you don’t have to declare these investment earnings in your tax return unless a withdrawal is made within the first 10 years. Even if a withdrawal is made within this period, only the profit portion is assessable for income tax purposes, and you may be entitled to tax offsets of up to 30% of the profit portion as a result,” Lytas said.

Security

Investment bonds such as CommInsure’s Investment Growth Bond (IGB) provide capital guarantees, which are designed to provide certainty around the minimum value of your holdings in an investment option. Also unique to the IGB is the death benefit guarantee, which provides certainty around the minimum amount that will be paid on death of the last surviving life insured. These can be particularly important during times of market uncertainty.

Catering to different needs

Investment bonds are suitable for people across different life stages, including pre and post retirees, parents saving for their child’s educational costs, high net worth individuals looking for an alternative to super, as well as those looking for estate planning options.

Parents may invest for their child aged at least 10 years, and the child may assume ownership of the assets when they reach a nominated age.

For those looking at distributing their wealth, investment bonds that offer a death benefit guarantee can provide certainty around the minimum amount their beneficiaries will receive.

According to Lytas, there is an increasing demand for investment bonds, particularly from those who have or are close to exhausting their concessional and non-concessional contributions to superannuation.

“For some people, [superannuation] might be too late, or they may need greater flexibility. They are looking at other forms of investing, and that’s where the investment growth bond comes in,” he said.

This information was prepared by CommInsure, a registered business name of The Colonial Mutual Life Assurance Society Limited ABN 12 004 021 809 AFSL 235035 (CMLA) a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. It is based on legislation current as at 12 December 2016. This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account. Any securities or prices used in the examples given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information. CMLA is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.