Michael McQueen, CIO of Foresters Financial, said with the $3 million super cap coming into effect, investment bonds also provide an alternative, tax-efficient investment while still receiving a comparative return.
“Investment bonds are an insurance-type arrangement – a contractual obligation between an individual and a life insurance provider,” he said.
“There is no cap on contributions and we invest your money commensurate with the options available – a balance between growth defensive assets, a tilt towards growth assets or a high growth approach.
“The investor can nominate a non-dependant as the beneficiary as well, so when the investment bond matures and the beneficiary is entitled to the net contributions, plus profit and there is not additional tax to pay.”
Mr McQueen said investment bonds also offers “embedded value” as they ensure the member’s wishes are being respected.
“In regard to the $3 million super cap, whether it is real or perceived, many SMSFs are going to breach that cap but they can allocate surplus savings into an investment bond which is non-distributing, tax-efficient, and helps with estate planning.
“They usually sit outside an SMSF and outside of a super trust. It’s your own money outside of superannuation.
“If you have money sitting there not compounding it is sub-optimal, while with an investment bond you end up with a withdrawal amount that can be higher than inflation,” he said.
“In something like a term deposit, the money will mature and then you have to pay tax at your marginal rate, while in an investment bond, you don’t.
“It is a unique structure but given the wealth that is being created and handed down it is a product that will have its time in the sun.”
Mr McQueen said investments bonds complement superannuation, not replace it.
“It’s got a high utility value – it can fit a number of circumstances. We have members who will give us an upfront amount of capital and won’t contribute again, while others use it as a savings vehicle.
“In the superannuation space, members can be highly reactive to economic circumstances and tend to redeem stocks and move to cash when there is a bear market. But an investment bond creates a much stronger framework to prevent these mistakes.”
“Even though there is a life insured, generally we talk about 10-year time frame as then there is no personal tax to pay for the amount that is the bond,” he said.
“Ideally you want to stay invested for at least 10 years for tax purposes, but you can redeem it if your circumstances change.
