(This article comes from a newsletter written by respected financial advisor Noel Whittaker)
Insurance bonds are going to make a big comeback thanks to the changes to superannuation. Unfortunately, its a sad reality that most Australians (and even some financial advisers) cant get their heads around them.
This is a great pity because they are one of the simplest and most tax effective investments available. All you have to do is make an investment into the bond and sit back and watch it grow. Then, after you have owned the bond for 10 years, you can withdraw all or part of the proceeds free of tax. However, there is no obligation to withdraw your money and you can leave it in the low tax insurance bond area for as long as you wish.
Insurance bonds are great vehicles for saving tax because, like superannuation, the fund pays the tax on the investors behalf. If you have money in superannuation, the fund itself pays income tax at 15 percent, but your money is tied up until at least age 55. There is also a limit on how much can be contributed to this low tax environment. Insurance bond funds pay a higher rate of tax (30 percent), but there is no limit on contributions and you can access your money at any stage.
Access is a major feature. 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 fully taxable, but you will be entitled to a 30 percent rebate to compensate for the tax already paid by the fund.
A unique benefit of insurance bonds is that the owner can make additional deposits each year and, provided the sum invested is not more than 125 percent of last years contribution, the 10 year period stays intact. For example, you could deposit $10,000 in year one, $12,500 in year two, $15,625 in year three and still redeem all proceeds tax-free in year 10.