Bonds the way to go to cut tax

Investment bonds touted as the “next best thing” after superannuation to reduce tax writes Anthony Keane

CHANGES to superannuation rules next month are making investment bonds increasingly popular for people seeking tax breaks on their savings.

These investment products, described as the “next best thing” after superannuation when it comes to tax benefits, are set to benefit from the lower caps and contribution limits on super that are targeting higherwealth workers and retirees.

“Investment bonds are a taxpaid investment, with the tax paid by the issuing company rate of 30 per cent, which is considerably lower than a marginal tax rate that can be as high as 45 per cent,” said KeyInvest general manager of financial services Andrew Meinel.

He said KeyInvest had recorded a 161 per cent jump in applications for its Life Events Bond in the three months to May, and sales were expected to rise further when new super rules came into force on July 1.

Unlike super, an investment bond does not lock your money away until retirement.

However, its best tax benefits only go to people who hold the bonds for 10 years or more — because they pay no income tax on the investment, and no capital gains tax when cashing out or switching investment options.

Providers include KeyInvest, IOOF and AMP, which offer investment options ranging from conservative to highgrowth Australian or international shares.

“Investment bonds are widely considered to be the next best thing (after super) from a tax point of view, especially for those on marginal personal tax rates above 30 per cent as it allows them to enjoy potentially significant tax benefits,” Mr Meinel said.

He said investment bonds could work alongside the age pension and superannuation. “With all the changes and uncertainty in these other areas, those worried about running out of money in retirement are seeing investment bonds as a third leg that gives them greater security.” The managing director of financial planning at Advantage One Financial Services, Andrew Venning, said there had been a swing towards investment bonds over the past two years.

“Our clients definitely now view it as potential solution,” he said. “Adding to the appeal is the fact that earnings generally don’t have to be declared in your income tax return, unless you make a withdrawal within the first 10 years.”

He said potential drawbacks included the perceived lack of direct control of your money.

Also, taxes are payable if you withdraw the money before 10 years, and the 10-year rule resets if you don’t make a contribution in one year. WHEN I complained of being cold as a youngster, I was often met with the reply “well, put on a jumper then”.

When winter rolled around, our family delayed the use of our old heater for as long as possible, because back in those days, appliances were less efficient and could add significantly to the household bills when used too often.

Of course, living in coastal Australia, you were never in danger of freezing to death.

On the occasions the temperature plummeted below 15C, a jumper and some tracksuit pants could solve most of your troubles.

These days, however, appliances have changed and you can tailor their usage to your needs without blowing the budget.