You were thinking how to invest to fund the education of your children or how to gift them money on an occasion such as when they turn 18. With education and other costs outpacing wages growth and increasing year on year outstripping inflation you need to be confident about making the right choice when it comes to planning for your children’s future.
There are two tax effective ways you can achieve your financial goals – investing using investment bonds and children education bonds.
This article will explain what you need to know about investment bonds and the next article will cover children education bond.
Investment bonds also known as insurance bonds are investments offered by insurance companies and friendly societies. They have features similar to managed funds combined with an insurance policy and can be tax effective to invest for your child. You can invest for yourself or invest on behalf of a child. The rules on passing of the control to the child depends on the child’s age.
Typically persons ages 16 and over, or companies and trusts and children aged 10 to 16 with parent or guardian consent can invest in investment bonds. These investments are long term investments, usually 10 years or more and as such you need to plan and maintain the investment over a period of time to provide you with the best opportunity to grow your wealth for yourself or your child.
When it comes to investing you have many choices. It could be savings in banks, listed securities (shares), managed funds and the like. Whatever be your choice of investment you should weigh up amongst other things the investment options on offer, growth, flexibility and convenience, tax-effectiveness, estate planning and an assurance that the invested money is available to you when you need it instead of getting locked up to a pre-determined time period such as term deposits.
We will now see how an investment bond addresses these criteria.
Investment bonds offer the investors a wide variety of investment options to choose from. Each investment option offered invests in an underlying portfolios(s) managed according to the underlying portfolio’s objectives. These objectives are descriptions about what returns the appointed investment manager aims to achieve. Your challenge is to select the investment option(s) that aligns your objectives with that of the investment manager.
The growth you expect from your investment depends on your needs in conjunction with your risk profile. The expected growth in your portfolio depends on the performance of the portfolio over a period of time and the investment option you choose. You can use the historical return from the portfolio as a guide to predict the future growth but be aware that history may not repeat itself. Therefore, you need to review your portfolio performance periodically and may even make adjustments to suit your personal circumstances and your objectives at that time.
Investment bonds not only provide you with a choice of investments to choose from but also offers you the flexibility to swap between investment options online. The switching from one investment option to another should not be a knee jerk reaction to a short time volatility. You should be mindful that investments have to be kept for medium to long term to achieve their target returns. Therefore, any switch should be a well thought out decision and you may need expert advice from a financial advisor.
Investment bonds are tax effective investments compared to some other forms of investments. They are ‘tax paid’ investments because the returns you receive is after the fund has paid the corporate tax (currently 30%). Therefore, you don’t have the burden of declaring the returns in your personal income tax return including any capital gains your portfolio incurs. You also do not pay medicare levy and surcharge. You may also be not pushed in to a higher tax bracket because the investment returns do not have to be included in your personal tax return. Investment bonds offer you the flexibility to withdraw the money before their maturity, normally 10 years. You have to pay tax on the earnings portion of the withdrawal albeit with a tax offset of 30% if you do so. Note that the withdrawal of your contribution is always tax free. No personal tax is payable at any time on a withdrawal if the last surviving insured person dies, or serious illness or disability affecting last surviving insured person, or unforeseen serious financial hardship affecting you as the investor. The assessable portion of your investment for income tax purposes decreases as you hold the bonds longer such that you pay less tax if you keep the bonds for a longer period. Withdrawals after the maturity date is tax-free subject to rules – most commonly what is known as the 125% rule.
When it comes to estate planning, investment bond gives you total control over to whom you wish to transfer your wealth. You can nominate a beneficiary or beneficiaries rather than leaving your wealth forming part of your estate should you pass away. The wealth in your estate may not go to intended recipients even if you have a will because it can be contested.
It will be a satisfying to put away a little bit of money for your children or grandchildren each month. You can start with as little as $1,000 as initial deposit and opt for a regular savings plan with a minimum contribution of $100 at a frequency you decide. Imagine the smile on the face of the child when gifting money on their 18th birthday. More importantly you would have demonstrated to them how a little forethought and management of money has produced this satisfying result. You would have taught them well about money management surely!
Investment bond with their ease, performance, investment choices and control, tax effectiveness, and the estate planning aspect is an appealing investment choice. It still has to fit in with your objectives and individual circumstances. Choosing the right investment option(s), monitoring them over a long period of time and managing their performance will need advice and assistance from a financial advisor.
Consult a financial advisor today and put a smile on your child’s face!
Be wise, be prepared, be safe!