Shifting sands of super pitch investment bonds as a viable alternative

The Federal Government’s decision to introduce a $3 million cap on super balances above which earnings will be taxed at a higher rate is yet another reminder to retirees and their advisers that the superannuation system is still evolving.

Every legislated change increases the likelihood of unintended consequences and second-order effects.

The proposed $3 million cap is a case in point. The fact the $3 million cap won’t be indexed means the estimated 80,000 Australians affected will only grow.

The simple fact is that super will continue to change. Which is not to argue that it still shouldn’t be an integral part of everyone’s retirement income strategy. It is to argue that having complementary investment strategies should be considered. 

This is exactly why investment bonds should be on every retiree’s radar as a complementary investment structure for protecting wealth and creating an intergenerational legacy. Whilst similar to super in terms of investment style and philosophy, they have their own benefits too.

Let’s talk about what makes them unique.

Investment bonds are non-distributing and are taxed at a maximum rate of 30 per cent. Money can be withdrawn at any time if your circumstances change; however, if withdrawn within 10 years, earnings will be taxed.

If held for more than 10 years, contributions and earnings can be withdrawn with no further tax to pay.

There is no limit on the first year’s contribution. Unlike super, it is completely uncapped. After that, it is capped at 125% of the prior years’ contribution, meaning the initial investment sets the benchmark.

If a contribution exceeds 125% of the previous year’s contribution, the start date of the 10-year tax rule is reset and the investor needs to pay the outstanding tax in their annual return.

However, they are much more than just a tax play.

Investment bonds can be taken out individually or jointly, by children aged 10 to 16 (with parental or guardian permission), by companies or trusts. This means they are an efficient way to protect and invest an inheritance, the sale proceeds from a business, a compensation payout, or a redundancy.

They can even be used in retirement to reinvest, outside of super, the legislated minimum pension payment from your superannuation account.

Estate planning also is a unique feature of investment bonds. Sitting outside of an estate, they cannot be contested, are not subject to inheritance taxes, and don’t require probate to mature and vest.

For blended families in particular, investment bonds can give peace of mind by ensuring the money allocated to specific beneficiaries, including non-dependents, does not lapse and cannot be contested.

There is also the added benefit of flexibility. Ownership can be assigned or transferred at any time with no tax impact. It’s the same with beneficiaries, as well as there being no restrictions on nominating non-dependents or changing beneficiaries.

They also have the capacity to potentially shield assets from creditors and enhance benefits or entitlements from Services Australia. With regards the latter, from 1 July 2023, Services Australia does not count a funeral bond (a specific type of investment bond) below $15,000 as an assessable asset if it is assigned to a funeral director, is for prepaid funeral services, or the contract sets out the services and says they’re paid in full.

Couples can reduce their asset test by $30,000 if they each take out an individual funeral bond.

Investment bonds are also an excellent way to save for one of life’s milestones, such as your grandchildren’s education.

For example, investing in an education bond can ease much of the financial stress of meeting private school fees in Grades 6 to 12 as the tax-free earnings become available for withdrawal.

From an investment perspective, they give investors access to institutional-grade, globally diversified investment portfolios that sit outside the reach of superannuation regulation.

At Foresters, there are four investment options – sustainable, balanced, growth, and high growth – that can provide an investment strategy that complements your superannuation.

Foresters oversee all aspects of investment management, including manager selection, strategic asset allocation, dynamic tilting, and rebalancing – with a high watermark on investment governance driven by a formal Investment Committee of experienced Independent Directors.

Being a boutique Australian financial services company owned by its members, Foresters have a unique, structural advantage compared to those who are conflicted with a profit-to-shareholder model. Foresters see themselves as locals, not tourists, with a rich heritage dating back to 1849.

It’s a long-standing fact that diversification lowers a portfolio’s investment risk. In an ever-changing world of superannuation law, investment bonds lower your retirement’s regulatory risk and provide a sanctuary to grow, protect and transfer your personal wealth to the next generation. 

Michael McQueen is the Chief Investment Officer of Foresters Financial