The new way to safeguard yourself for retirement
INVESTMENT bonds, once called insurance bonds, are rapidly growing in popularity as super loses its attractiveness as a tax saving tool.
The tax rate paid by the bond fund is a flat 30%, there is no Medicare levy, no limit on contributions and you can access your money at any stage. Unfortunately, there are misunderstandings about access.
Your money is not tied up for 10 years and you can withdraw all or part of the balance whenever you wish.
If you do withdraw your money early, the profits will be taxable but you will be entitled to a 30% rebate to compensate for the tax paid by the fund.
Sometimes it is better to redeem the bond early.
Think about Sue, who was given a $10,000 share-based investment bond by her grandparents seven years ago. If the bond earns 8% per annum, it would now be worth $17,000.
The purpose of the gift was to assist with her university education and Sue, now aged 21, is earning $24,000 a year from casual work. She could wait for three years and have all the proceeds tax-free, or cash the bond in now.
If she cashed in the bond now, the profit of $7000 would be added to her taxable income but would carry with it a tax credit of $2100.
Her taxable income would be $31,000 on which tax payable would be $1987. The tax credit wiped out the tax on redemption of the bond, as well as tax due on her income from casual work. Redeeming the bond early gives a better outcome.
A major benefit of investment bonds is they can be transferred to another party free of capital gains tax. Most investment bonds offer a range of options such as Australian shares, international shares and fixed interest.
A special benefit is you can move between these options at will without paying capital gains tax - no other investment vehicle offers this.
There are a range of bonds such as the IOOF WealthBuilder and Austock bond. All have different features so ensure you take advice to ensure the bond you end up with fits your goals and your risk profile.