Often clients come to us when they have received an inheritance. Their goal is often to ensure they leverage their position by finding the most tax effective investment opportunities. This was the case for Lisa and Chad. They also had two young children aged 8 and 6 were looking at ways to invest some money to help with their university and early adult years.
Lisa and Chad were looking for an investment that they would be able to access in 10 or so years. Being professionals earning good salaries put them in the highest tax bracket and they also had concerns about handing 49cents in the dollar to the ATO.
Having paid off their mortgage, they had $100,000 available and were wanting to grow it for the future. It became apparent that investment bonds would be a good option to complement a strategy to top up their super balances and manage tax.
Why you should consider an investment bond
- Tax is paid along the way within the bond at the company tax rate of 30% and in many cases as low as 15% depending on the investment within the bond. If your marginal tax rate is above this, then a personal tax saving may result, a significant one if you are in the highest marginal tax bracket. This also means there is no personal tax liability and no requirement for tax reporting when lodging your tax return each year.
- As tax is paid along the way, when you decide to redeem your investment (after 10 years) there is no personal tax payable on withdrawals. This differs to personally held investments, where appreciation of your investment, may trigger a capital gain liability. If you decide to withdraw your investment within ten years, tax offsets may still apply which still deem this structure favourable for many clients.
- There are various investment options available to suit your goals and objectives. We meet many new clients who have large sums sitting in savings accounts, attracting very little interest. An investment bond can provide different investment options to attract returns greater than a savings account. You can choose from conservative or growth assets, depending on your goals and appetite for risk.
- You can access the funds at any time. Unlike Superannuation whereby you must meet a condition of release to access your funds, an investment bond can be cashed in at any time. If you are looking to retire a little earlier than expected, this is a favourable investment option - no waiting until you are 60 for your superannuation!
- Great alternative to kids’ savings accounts. Due to the potential for greater investment returns and no personal tax liability at redemption, investment bonds can be a great alternative to the personal savings account due to the potential for greater returns. Investment Bonds can also be a beneficial estate planning tool to counter any unintended consequences from minors receiving large sums from estates.
How we helped Lisa and Chad
In Lisa and Chad's case, we looked at tax effective methods to contribute to super including maximising their salary sacrifice and utilising carry forward contributions to capture any unused concessional caps from previous financial years. This left the couple with another $50,000 to put into an investment bond. Our strategy involved putting away another $500 per month. We also advised that they should increase their monthly payments by 10% each year. Our projections calculated that in 10 years Lisa and Chad’s after-tax return would be $221,296.
On the flip side we looked at what would happen if they invested the same money into a savings account. The after-tax return came out at $95,625 due to the low interest rates (approximately 2%) these type of accounts offer and the personal tax liability these earnings attract. Lisa and Chad didn’t need any convincing about the better option!
Investing for your children’s future
Investment bonds are a great option if you want to put some money aside to help your kids with things like buying their first car, going to university, or contributing to a first home deposit.
Lisa and Chad decided to invest an initial sum of $5,000 per child and contribute $150 per month for both of their children. Also increasing their contributions by 10% each year our projections calculated that the after-tax return of a 15-year investment would be $114,594. Alternatively, a savings account for the same period, with no withdrawals would grow to $57,190. Again – the choice is a ‘no-brainer.’
Investment bonds are a great option if you are looking for a way to grow your wealth in the medium or long-term. Unlike super, you can withdraw money at any time (although there are some tax consequences for taking it out prior to 10 years). Lisa and Chad were delighted with the strategy as they are also hoping it may enable them to make an early retirement and provide them with access to funds before they are eligible to tap into super at age 60.
Everyone’s circumstances are unique. If you are looking for help with ways to best grow your wealth get in touch. We love helping our clients to be their financial best.
the projections in this article are based on the following assumptions
• 47% marginal tax rate for individuals • 2% annual before tax return on cash account • High Growth Portfolio selected for kids’ investments ($5K) • Growth Portfolio selected for adults’ investment ($50K) • Total annual after-tax investment return of investment bond ($50K) – 6.58% • Total annual after-tax investment return of investment bond – 8.61% • Investment bond returns have been provided by the investment bond issuer. • 0.67% fee on both investment bond (includes admin & investment fees)
Past performance is not an indicator for future returns.
General Advice Warning: The information provided in this article is general in nature and does not consider your particular investment objectives, financial situation, or insurance needs; we therefore recommend you seek advice tailored to your individual circumstances before making any specific decisions.
Dobbrick Financial Services (Gympie) Pty Ltd ABN 48 931 205 109 and Dobbrick Financial Services (Ipswich) ABN 86 100 184 521 & DFS Oakland ABN 64 340 527 395 and their advisers are authorised representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306.
