Investment bonds - a smart way to pass on wealth 

Investment bonds are a potential secret weapon for Australians who want to safely execute the transfer of assets to future generations.

Providing a compelling combination of tax benefits, asset protection and control over the distribution of wealth, many financial advisers see these bonds – which are not related to government bonds – as a highly effective estate planning tool.

Anthony Williams, Technical Services Manager at Mercer Financial Advice, believes investment bonds are under-used and offer special legal advantages when transferring wealth to the next generation.

They let you nominate specific beneficiaries, which may or may not be the same as the beneficiaries in your will.  The proceeds of an investment bond are usually distributed independently of the deceased’s will. This can offer protection against estate disputes and reduce delays in asset transfers – an especially useful feature for blended families and in situations with vulnerable beneficiaries.

“If a beneficiary is nominated, the asset is designed to be paid independently of the deceased’s estate” Williams says.

He advises getting specialised legal or accounting advice before making any estate planning decisions.

Investment bonds function in a similar way to a managed fund, providing a menu of investment options.

Investors contribute a lump sum, or make regular payments, with the funds being invested in diversified portfolios such as shares, property, or fixed interest. Unlike superannuation, there are no restrictions on when money in an investment bond can be accessed.

Possible tax advantages are one of the big attractions of investment bonds. Provided no withdrawals are made in the first 10 years, proceeds are generally tax-free when the bond is cashed out.

In the interim, these bonds are taxed at a maximum rate of 30%, which is lower than the marginal tax rate for high-income Australians. Earnings from the bond are not declared in annual personal tax returns.

Williams notes that while there are no caps on the initial sum invested, additional contributions are limited to 125% of the previous year’s contributions. If you exceed this limit, you reset the 10-year clock for tax-paid withdrawals.

“If that sort of complexity discourages you, it’s probably best to stick with more traditional investments,” he says.

One of the other possible negatives of investment bonds, according to Williams, is that the 30% tax rate could be higher than those on a low personal income would normally be paying.

“So, it absolutely requires some attention to your financial circumstances to monitor whether it remains an appropriate investment for you.”

Education bonds are a category of investment bond and are specifically designed to help individuals and families save for education expenses. For example, they can be used for school fees, university tuition and vocational training.

Highly flexible, education bonds let you control how and when intended recipients can access the money, either as a lump sum, or through staggered payments. When accessed for approved education costs, they can provide additional tax benefits. This can be a real plus for anyone wanting to provide for the long-term financial needs of children or adult children who lack experience managing large sums of money.

Williams adds that inheritances from a will may often come too late for younger family members needing assistance with education costs. “For example, if I live to 80, my children are going to be close to their own retirement before they would receive anything from my estate. If I have goals to help my children get through an education at university, education bonds can provide them with financial assistance at the right point in time.”

Knowing that your wealth will be distributed according to your wishes, without the threat of legal disputes, can deliver real peace of mind.

Williams stresses, however, that investment bonds should not come at the exclusion of a will, which covers other crucial estate planning needs.

As always, he urges investors to get financial advice before signing on the dotted line.

“That remains true for any financial product,” he says. “Anyone who makes investments without paying attention to their own financial circumstances could end up with unintended consequences.”

To find out more about your investment options, speak to a Mercer Financial Adviser.