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Investment choices: Bonds

Date: 13 January 2017

Investment bonds can provide you with a simple, tax-effective, long term investment. They are also known as insurance bonds, and are ‘tax-paid’ life policy investments. This means the life company pays the tax on the investment earnings, making them potentially a tax-effective way to invest.

What are the advantages of bonds?

Tax effective investing

One of the most significant benefits of investing in bonds is the tax advantages, particularly for investors on a marginal tax rate greater than 30% as this is the maximum rate the life company pays on its investment earnings. Another benefit is, provided you hold your investment bond for 10 years, there is no tax on investment withdrawals (as long as contributions each year do not total more than 125% of the previous year’s contributions). You can switch between investment options without tax consequences.

Investing for children

Bonds can be used as an investment vehicle for children without incurring a penalty tax rate. A bond can be set up in a child’s name (ages 10–16) or you can invest on a child’s behalf (under 10 years of age) and transfer the ownership when the child reaches a certain age.

Estate planning benefits

Bonds are an attractive investment for estate planning as proceeds can be paid to any beneficiary (not just dependents) tax-free. Bonds are flexible as you can nominate more than one beneficiary and stipulate the percentage paid to each upon your death.

Increased Age Pension

The amount of your Age Pension depends on your family circumstances, income and assets. A bond, held through a family trust, may provide significant advantages by maximising Age Pension payments if they’re calculated under the Centrelink Income Test. They may also reduce aged care facility costs.

General Advice Warning: The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.

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