financial planning

Whenever an investment strategy is put in place to build and sustain wealth, it is centered on a basic understanding of the circumstances surrounding your personal financial situation, objectives and end goals. Putting your Superannuation to work is usually a crucial component of this equation because of the sheer amount of available investment options there are and the preferential tax-related treatment of your income and capital gains during the accumulation and pension phases.

In some cases, it can even be beneficial for you to hold and grow a part of your wealth outside of your superannuation fund(s). However, this will depend purely on your current financial situation and circumstances that can move you towards this include:

  • Saving for any medium to long term future expenses that will arise before you will be able to gain access to your Superannuation. These can include but may not be limited to saving up for a child’s education or even an extended overseas holiday
  • You might find that you want to continue with expanding your wealth, but you aren’t currently able to make additional contributions to your superannuation because of factors such as employment situation or age, or the fact that you might have exceeded your existing contribution cap limits

When taking the above mentioned situations into consideration, you could find that an investment bond (also referred to as an insurance bond) forms part of your complete investment portfolio.

Taking a Closer Look at Investment Bonds

An investment bond is a form of non-superannuation investment that is normally offered by friendly societies and various insurance companies. It works in much the same way as a regular managed fund in that your money is put with that from other investors and then overseen by appropriate fund managers and it is also combined with an insurance policy.

This form of investment has been available for a while and it provides an opportunity for individuals to expand their wealth alongside their superannuation in a tax effective way – provided that all relevant investment bond rules that govern contributions and withdrawals are adhered to and that the investment is suitable for your existing financial situation, objectives and goals.

Here are a few crucial aspects regarding investment bonds:

Tax Treatment

An investment bond is considered as a tax paid investment, which means that any applicable taxes will be paid by whoever issues the bond and not the owner of the investment. Maximum taxes paid on earnings is 30% before they are reinvested into the investment bond, but it is sometimes possible that other offsets such as franking credits could help further reduce the effective tax rate. You will also not normally be required to declare the earnings from these when submitting your tax return. This means that taking advantage of an investment bond could be extremely beneficial to your financial situation if your existing marginal tax rate is more than 30%.

Investment Options

Regardless of the type of investment you are working with, your particular risk profile is of utmost consideration. While investment options will differ between bond issuers, an investment bond will normally enable you to invest your funds in various options and build a customised portfolio that will be suitable for your risk profile. For instance, you could choose to invest in growth assets like property or shares, conservative assets like fixed interest or cash or even diversify by working with both.

Where withdrawals are concerned, if you choose to cash out your investment after 10 years, subject to the 125% rule mentioned below, no additional tax will need to be paid on earnings. However, in cases where this is done within the first 10 years, the rulings mentioned below will be applicable:

Investment bond – Tax treatment of earnings upon withdrawal
Withdrawal made Tax treatment
Within the first 8 years 100% of earnings assessed at your marginal tax rate (MTR)*
In year 9 Two-thirds of earnings assessed at your MTR*
In year 10 One-third of earnings assessed at your MTR*
After 10 years No additional tax payable on earnings

*Less a 30 tax offset.

Because of the specific tax treatment that is applied to earnings when a withdrawal is made, investors will normally hold their investments for more than 10 years to get he most benefit from them.

Original Contribution and Future Contributions – the 125% Rule

Although there is no official cap on your initial contribution to an investment bond, there are a few bond issuers who might require an initial minimum investment amount.

In addition, it is normally possible to make extra contributions in the future. This is as long as they do not add up to more than 125% of the value of contributions that were made the year before because they will be treated for tax reasons as though they had been made during the first year of having the investment. For instance, if you invest $2,000 during our first year, contributions for the years thereafter can be increased as displayed here – without breaking the 125% rule in any way:

 Investment bond – 125% rule 
Years Contributions
1 $2,000
2 $2,500
3 $3,125
4 $3,906
5 $4,883
5 $6,104
7 $7,629
8 $9,537
9 $11,921
10 $14,901

Before engaging in any investments, it is strongly recommended that you contact a reputable financial advisor. This will ensure that you are provided with the correct advice pertaining to your specific financial situation.

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