Hi Dean, I’m looking at ways to grow my wealth, but am unsure of the best structure. I’m in my early 50s, in my prime earning years and plan to work for the next 10 or more years. What are your thoughts on investment bonds and how do they compare to investing in my own name, or even within my super? Regards, James, Manly
Hi James, thanks for the question! It’s great that you’re thinking about your options. Investment bonds are a flexible and tax- efficient structure that often fly under the radar, but can be a smart choice depending on your circumstances.
What are investment bonds?
Investment bonds are a mix of investment and insurance, offering tax benefits that can be appealing if you’re in a higher tax bracket. Earnings inside the bond are taxed at a flat rate of 30 per cent. If you hold the bond for at least 10 years, the returns are tax-free when withdrawn, which makes them ideal for long-term goals.
Why consider investment bonds?
- Tax savings: If you’re in a high-income tax bracket, investing in your name means you’ll pay your marginal tax rate on returns, which could be up to 47 per cent (including Medicare). Within investment bonds, the 30 per cent company tax rate is automatically applied, and after 10 years, no further tax is owed on withdrawals. This can significantly enhance your long-term returns.
- Flexibility: Superannuation is fantastic for retirement, but it locks your money away until you reach preservation age. Investment bonds allow you to access your money earlier if needed, making them more suitable for medium-term goals, especially those with young families potentially looking to future-plan for the kids.
- Estate planning: You can nominate a beneficiary to receive the bond proceeds directly, avoiding lengthy probate processes. This can make things smoother and faster for your loved ones.
Comparing options
- In your name: While investing in your own name gives you the benefit of capital gains tax discounts (after holding assets for 12 months), higher-income earners can lose a large portion of their returns to taxes.
- Superannuation: Super’s low tax rate (15 per cent) on earnings is hard to beat, especially when it becomes tax-free in the pension phase. However, the limited access until retirement can be a drawback if you need flexibility.
Which one works for you?
It depends on your situation and goals. If flexibility and tax efficiency are important, investment bonds are worth considering. They offer more access than super but with better tax treatment than investing directly in your name.
For tailored advice, I’d suggest speaking with your financial advisor. Alternatively, I’m happy to chat if you have any further questions. Reach out anytime on 8376 0350.
Regards, Dean
Financial planner Dean Cowdroy of Up Wealth Management is an Authorised Representative of Consultum Financial Advisers Pty Ltd, AFSL 230323. Phone 8376 0350 or visit upwealthmanagement.com.au
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