Are Investment Bonds a DO or a DON’T?
Andrew Jeffers | January 23, 2018
How much do you know about investment bonds? Should you consider investing in one?
If you’ve been wondering the same thing, this article will be exactly what you’ll need to shed some light and clarity on the topic.
Let’s find out more about investment bonds.
What is an investment bond?
An investment bond, also referred to as insurance bond, is a type of long-term investment similar to a managed fund mixed with a life insurance policy.
In other words, your capital is combined with other investors’ money. A part of the total fund is then invested according to each contributor’s investment option. Does it make sense, now?
Insurance bonds offer you a few investment options you can choose from, such as:
Before you decide if this investment opportunity is a do or a don’t for you, let’s discover some of its key characteristics.
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Must-know rules about investment bonds
1. Hold your insurance bond for at least a decade
Here’s why: since insurance bonds are tax paid investments, the earnings received by the insurance company are taxed at 30% (at the current corporate tax rate) before getting back into the bond.
This means if your marginal tax rate is higher than 30%, investments bonds can be a profitable investment option for you.
2. The 125% rule
You can make additional contributions annually, but they shouldn’t exceed 125% of the previous year's contribution. Why? Because it will be regarded as part of the initial investment.
In other words, supplementary contributions don’t have to be invested for the full
10 years in order to get a tax benefit.
What happens if your investments exceed the 125% limit?
The start date for the 10 year period will reset. You’ll have to wait another 10 years from the date your excess contributions were made in order to get the full tax benefits.
Tip: Do you want to make the most out of your tax benefits? Contribute up to 125% of your previous year's contribution annually.
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The pro and cons of investment bonds
As long as you take into consideration the above-mentioned rules, it can be a great long-term investment opportunity
A great investment alternative to superannuation
It offers diversified investment options you can choose from
There are some fees involved, depending on your insurance provider and the bond you end up choosing
It can be a slow process, it takes some time to see the cash converting
You don’t have direct control over your investment