Are you looking to invest for your kids or grandchildren?

One investment option that regularly gets spoken about is an investment bond.

What is an investment bond?

An investment bond (also called an insurance bond) is a combination of an investment portfolio and a life insurance policy.

Investment bonds let you invest on behalf of your kids (or grandchildren) and have the ownership automatically transferred to the child at a date set in the future. It is for this reason that many like investment bonds as a way to help save for big ticket expenses like their education, a car, or house deposit.

You can also use investment bonds as a tax efficient way (especially for high income earners) to invest for your children.

You can select from a plethora of investment options to suit your situation and what you are trying to achieve.

What are the benefits of investment bonds?

An investment bond is a ‘tax paid’ investment.

This means the tax on investment earnings is paid by the bond issuer at the current company tax rate (maximum 30%).

Why is this attractive?

Well to deter adults from investing in children’s names to minimise tax, higher tax rates apply to children’s unearned income from investments and family trust distributions.

The first $416 of investment income is tax free (comparable to $18,000 for individuals)
Income between $417 to $1,307 is taxed at 66%
Income from $1,308 + is taxed at 45%

Furthermore, after 10 years from the start date of the investment you don’t need to pay personal income tax on the investment. So long as you don’t touch your investment for at least 10 years, you will not need to pay additional tax or capital gains tax.

What is the 10 year tax rule?

If an investor has held an investment bond for 10 years or more, earnings do not need to be declared as part of their assessable income with no additional personal or capital gains tax applicable.

Any withdrawals prior to the 10 year period, will mean the investor needs to declare the earnings in their tax return proportionate to the time of withdrawal.

If you withdraw within 8 years - 100% of earnings are taxed at your marginal tax rate, with a tax offset of 30% applied (being the tax you have already paid).

If you withdraw during the 9th year - 2/3 of earnings are taxed at your marginal tax rate with a tax offset of 30%.

If you withdraw during the 10th year - 1/3 of earnings are taxed at your marginal tax rate with a tax offset of 30%.

If you withdraw after the 10th year - all earnings are tax free.

125% Contribution Rule

Each year, investors can make additional contributions of up to 125% of the previous year’s contributions. The benefit of this is each addition is being treated as if it were invested at time of the original investment.

If the 125% limit is exceeded, the 10 year tax rule will restart.

Who are the main providers of investment bonds in Australia?

Westpac
CBA
ANZ
AMP
IOOF
KeyInvest
Centuria
Australian Unity
Generations Life
AIA

With each provider, there are varying investment options, administration fees, and investment fees.

Understanding the universe and undertaking your research will allow you to make an informed decision, on what provider and underlying investment is right for your specific circumstances.

CASE STUDY

Matt & Bec are proud parents of Harry.

Harry is an energetic one year old, who spends his days causing as much mayhem as possible.

While he plays without care, Matt & Bec would like set aside something for his future.

Matt & Bec are both in finance and understand the support young people will need when they look to get into the housing market.

They want to set aside money for Harry to take on one day, but they want to do so in a tax efficient way that will grow over time.

When setting up an investment bond for Harry, Matt & Bec intend to invest $10,000 and contribute $200 per month for the next 20 years.

They are planning to gift Harry the whole amount when he turns 21 and set this as his vesting age.

When Harry reaches his vesting age, the account will automatically transfer to him.

No tax incurred by the transfer for either Harry or his parents.

Based on our projections it is estimated that after fees and taxes, that Harry will receive over $100,000 at the age of 21, which will go a long way in providing a deposit for his first home.

The investment bond has allowed Harry’s parents to create a considerable sum on his behalf and easily transfer it to him.

The responsibility of the money will then be Harry’s and at 21 we are sure that he will be optimistic about the options and opportunities that are now open to him.

If you are a parent that is looking at setting your children up, there are a number of other things to consider:

Insurance - ensure your personal insurance policies are sufficient and are structured correctly (Life cover, disability cover, income protection and trauma). This will ensure that should you become injured, ill or pass your loved ones will not be left financially worse off.
Estate Planning - ensure your estate planning wishes are reflected in your Will. Including who will look after your children should you pass, who will manage their financial affairs, how the monies is held in trust (including where it is invested, and what it can be used for), and ensuring your superannuation funds are inline with your estate planning wishes. This will ensure your loved ones are looked after in the event you pass and in the most tax effective manner too.

If you are looking to invest in an investment bond and don’t know where to start, contact our expert financial planning advisors whom will be able to provide you with personalised tailored advice for your specific circumstances.

Email: info@newcastleadvisor.com

Investing for your kids or grandchildren?