“I'm looking at investment bonds for my grandchildren. Where do I start? How can I find out where to purchase and what to purchase?"
-Question from John in Sandgate, QLD
Top answer provided by:
John Hutchinson
Investment bonds can be a very tax-effective structure for investing, and also provide attractive features for estate planning purposes or for transferring ownership at a future date.
Investment earnings within an investment bond are taxed at the company rate of 30%, while if they are held for 10 years or more and contribution limits have been adhered to, they are exempt from capital gains tax upon sale of the assets.
They also have the flexibility of changing ownership to a beneficiary at a nominated time (while an initial date to transfer ownership can be selected at the application stage, this can be adjusted at any time if circumstances change). The change of ownership does not trigger a capital gains event or does not result in stamp duty being payable. This can make an investment bond a very attractive structure when investing for children or grandchildren.
There are a few important things to consider when establishing an investment bond. Once you have determined the intent (in this case to invest for your grandchildren), other things to consider are:
How much are you willing to contribute?
It is important to determine the initial and ongoing contribution levels you are comfortable with. You may have an end figure in mind you wish to reach and work backwards from there or determine what fits in with your cash flow capacity. One very important rule with investment bonds is the 125% rule, where each year your contributions are capped at 125% of the previous years (e.g. if you contribute $10,000 in year one, the maximum you can contribute in year two is $12,500). If this is breached, the 10-year period for capital gains exemption will be reset.
What is your risk profile?
Through an investment bond you typically will have a range of investment options across Australian shares, international shares, listed property, infrastructure, and fixed interest assets. It is important to identify what your investment objectives are, the timeframe you intend to invest, and the level of risk and volatility you are prepared to accept to achieve the investment outcomes.
What is the right investment bond provider?
There are a number of investment bond providers available, with some of the larger providers including Generation Life, Australian Unity and Centuria. When selecting the right provider, it is important to understand their different features, compare fees and their range of investment options.
The above steps should help start the process if you are looking to set-up an investment bond yourself. Alternatively, if you speak with a financial adviser, they should be able to walk through the pros and cons of different options, and if you proceed with an investment bond, help identify the right provider, investment option and contribution plan for your situation.
While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.
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Comments1
"Thank you this has been very helpful and much appreciated."
JJ 15:59 on 26 Feb 24