Building the
Q
What is an insurance
bond?
An investment bond (also
known as an insurance or
growth bond) is a tax-paid
investment offered by an insurance
company. It’s technically a life insurance
policy so you need to nominate a life to be
insured and a beneficiary. Provided certain
rules are met, investment bonds can be a
tax-effective way to invest for long-term
investors with a marginal tax rate higher
than 30%, as the owner is not required to
include the income on their tax return.
DARREN JAMESQ
What can an investment bond be
used for?
First and foremost they are for investing in
funds. You are simply gaining investment
exposure by accessing a range of managed
fund options within a capped tax structure.
As a bond is an investment life insurance
product provided by an issuer, it can be
used for a wide range of strategies, from
tax management and estate planning to
general wealth accumulation and building
retirement nest eggs.
Some of the reasons people invest in
bonds include: saving outside the super
system for early retirement access;
superannuation caps have been exhausted;
trusts want to keep distributable income
down; estate planning issues; and as a
simple saving strategy.
SUE HERRALDQ
When is the best time to start
an investment bond?
If we start with the premise that many
people use an investment bond to help pay
for a major expense, then it’s never too
early to start. Other people use investment
bonds to accumulate a deposit for a first
home or to maximise the tax efficiency
of their discretionary family trust. You
don’t need to start with much – a little
can go a long way if you let the power of
compounding returns do the heavy lifting.
ADNAN GLINACQ
How is money invested?
Issuers of investment bonds can
offer a range of underlying options. These
include high-quality externally managedfunds where investors have the
opportunity to switch between
investment options over the
life of the bond at no cost.
Investment options can cover cash
andfixed-interest funds, diversified
balanced funds, diversified growth funds,
Australian share funds, international
share funds and property and
infrastructure funds, among others.
MICHAEL BLAKEQ
What returns should an
investment bond deliver?
Each investment option has a different
investment objective, strategy and level
of risk. Ultimately, the risk-and-return
profile of each investment option depends
on the underlying assets. Investors should
read the product disclosure statement
carefully before making a choice, and
ensure they choose a strategy that meets
their risk appetite, investment objective
and time horizon.
Of course, no investment can ever
guarantee a specific return, and all
investment involves some risk. This
includes the risk that returns are lower than
expected, they do not materialise and, in
some cases, there is a capital loss.
MICHAEL BLAKEQ
How are the fees structured?
Investing in investment bonds
is essentially the same as investing in
managed funds. Therefore, the usual
management expense ratios (MERs)
associated with the underlying managed
funds are applied. The MER is the fee
charged by the underlying fund manager
for managing the investment. Also the
issuer charges an administration fee to
cover the maintenance of the investment,
including unit price calculations, tax
administration and general operations.
SUE HERRALDQ
What are the tax considerations?
Investment bonds use a “tax-free”
structure – this means that tax paid on any
investment returns is paid within the bond
at a rate of 30%. Returns are reinvested
during the life of the investment, so
earnings have no impact on an investor’s
personal tax position while the bond is10
MOST-ASKED
QUESTIONS