Investment Bonds as a Long Term Wealth Building Strategy

What are your opinions on Investment Bonds as a long term wealth building strategy compared against directly investing in a share portfolio outside of super?

Currently I am contributing almost the full cap to super but wish to build wealth outside of super to cover the transition say from early retirement to when super can be accessed. My wife and I are 33 and each earn around $96K (plus receiving 12% and 17% employer contributions respectively), have about $200K in equity in our home, and a small share portfolio around $20K.

Going forward our intentions are to invest more into shares but will obviously be paying income tax on distributions at 39% and CGT when sold. The lower tax rate on investment bonds and CGT free nature seems like a good option especially when the same investment products are available (e.g. Vanguard index funds).

Are there hidden disadvantages other than locking the money away for 10 years?

 

A: Thanks for the question.

I like investment insurance bonds for those that who cannot readily invest directly or who want a “set and forget” tax outcome. I wouldn’t invest in them myself – but I have purchased an investment bond for my grandchild.

As you note, they are a tax paid investment at around 30%, so arguably, they don’t suit investors with a tax rate below 30%. An exception to this is minor, who rapidly goes from a tax rate of 0% to a tax rate of 66%, and can have all sorts of complications in registering assets.

For a taxpayer paying tax at 39%, they might make some sense. However:

  1. Your investment is effectively locked up for 10 years;
  2. Management fees are relatively high – typically at least 1.0% pa;
  3. You cannot take advantage of gearing and the tax deductions that go with  borrowing to invest in property or direct shares.

Hope this helps


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