SMSF members bumping against contribution caps each year may want to consider the use of investment bonds as a long-term, tax-effective investment that is complementary to their superannuation, according to the head of a member-owned friendly society.
Foresters Financial chief executive Emma Sakellaris said investment bonds sat comfortably alongside superannuation as they allowed fund members to invest an initial amount and make ongoing contributions during the period the bond was held, while not being locked down at any time.
“For people who have reached their superannuation contribution limits but have additional funds they would like to save for retirement, investment bonds offer a flexible tax-advantaged approach,” Sakellaris said.
“Investment bonds have a maximum tax rate of 30 per cent on earnings in the bond, so for people on a higher tax rate it is very effective. Furthermore, investors do not have to pay any personal tax on the money invested or the interest while funds remain invested.
“If the bond is held for 10 years or more, any withdrawals from investment bonds after that period are not liable for personal income tax and are not required to be included in tax returns.
“For those concerned about locking their money away in superannuation, investment bonds have the further advantage of allowing people the flexibility to access the funds whenever they wish, subject to certain investment requirements being met.”
She said the 10-year tax-free time frame was not a barrier to most investors as there was an ability to exit the investment bond at any time if required at the cost of a reduced tax rate on returns.
“People are always more comfortable to commit to a 10-year time frame when they know there is an exit and it is not so much that they want to exit at five or seven years, but there’s peace of mind that they know they can if they need to.”
Despite this, she added that uptake of investment bonds by members of superannuation fund and SMSFs was still limited to high net worth investors and people receiving advice, but they can play a role in estate planning for all kinds of fund members.
“People don’t understand the estate planning side, but you can actually pass assets to beneficiaries without the risk of having those assets contested as part of what has become a pretty complex family structure that is apparent in a lot of Australian households,” she said.
“With an investment bond you can be very specific about the beneficiary of that bond and you can’t contest that, so upon passing that investment bond passes tax-free to those beneficiaries.
“It cannot be contested as part of the estate process and when someone applies for probate when someone passes away, the investment bond does not sit as part of that probate process but it sits separately.”
