CHANGES to superannuation rules next month are making investment bonds increasingly popular for people seeking tax breaks on their savings.
These investment products, described as the “next best thing” after superannuation when it comes to tax benefits, are set to benefit from the lower caps and contribution limits on super that are targeting higher-wealth workers and retirees.
“Investment bonds are a tax-paid investment, with the tax paid by the issuing company rate of 30 per cent, which is considerably lower than a marginal tax rate that can be as high as 45 per cent,” said KeyInvest general manager of financial services Andrew Meinel.
He said KeyInvest had recorded a 161 per cent jump in applications for its Life Events Bond in the three months to May, and sales were expected to rise further when new super rules came into force on July 1.
Unlike super, an investment bond does not lock your money away until retirement.
However, its best tax benefits only go to people who hold the bonds for 10 years or more — because they pay no income tax on the investment, and no capital gains tax when cashing out or switching investment options.
Providers include KeyInvest, IOOF and AMP, which offer investment options ranging from conservative to high-growth Australian or international shares.
“Investment bonds are widely considered to be the next best thing (after super) from a tax point of view, especially for those on marginal personal tax rates above 30 per cent as it allows them to enjoy potentially significant tax benefits,” Mr Meinel said.
He said investment bonds could work alongside the age pension and superannuation.
“With all the changes and uncertainty in these other areas, those worried about running out of money in retirement are seeing investment bonds as a third leg that gives them greater security.”
The managing director of financial planning at Advantage One Financial Services, Andrew Venning, said there had been a swing towards investment bonds over the past two years.
“Our clients definitely now view it as potential solution,” he said.
“Adding to the appeal is the fact that earnings generally don’t have to be declared in your income tax return, unless you make a withdrawal within the first 10 years.
“I think, too, that financial advisers are reacquainting themselves with the features and benefits of a product that is again in vogue.”
Mr Venning said potential drawbacks included the perceived lack of direct control of your money.
Also, taxes are payable if you withdraw the money before 10 years, and the 10-year rule resets if you don’t make a contribution in one year.
Originally published as ‘Next best thing to super’ back in vogue
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