Investment Bonds

Do you have clients that have either reached the $1.6million pension cap or are past the age of being able to contribute to super? Has a discussion about Investment Bonds been held?

Take this scenario

  • Client age 70 (widow) sold her family home for $4million and set aside $2million to move into a smaller home however she wanted to travel for the next 1-2years whilst she was physically able to do so (pre-Covid).
  • Unfortunately, she had only held her home for 7 years so wasn’t able to put any money into super however even if she did it would have only been $300,000.

So what are some of her options?

  • Invest in her own name.
  • Invest in a trust with other family members.
  • Consider an investment bond for part thereof.

The client indicated over the next 10 years she would need approximately $100k p.a. to live off so in conservative terms $1million. That left me with a further $1million to invest as $2million was going to go to a home at some stage.

Recommendation – invest $1million into a diversified portfolio in the client’s name which offered:

  • Diversification – a well diversified portfolio in line with her Balanced risk profile.
  • Liquidity & access – the ability to sell down and redeem should the need arise at short notice.
  • Low tax (estimated $40k p.a. income before deductions)
  • 2nd Recommendation to invest $1million into an investment bond in the client’s name.
  • Earnings within the bond are taxed at a maximum rate of 30% (generally for a Balanced investor after franking credits it’s approximately 21-23%) so not much more than super and lower than if held personally.
  • Money is fully accessible, with tax benefits provided if held for the long-term.
  • Given its expected the client won’t need access to the funds then if we assume a 6% compound return each year the portfolio is estimated to grow to $1.8million which could be drawn down tax-free after 10 years.

Written by Marcus Ainger, Director – Private Client Adviser

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

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