I HAVE often written about the benefits of investing in insurance/investment bonds, but recently I received an email from a reader that asked: "Why anybody would prefer insurance bonds to superannuation where the tax rate paid by the fund is just 15% per annum and withdrawals are tax-free after age 60.”
It's a great question, but the reality is that superannuation is not a realistic option for many people.
Think about a high-earning professional in their 30s. Any money placed into super would be inaccessible for 25 years or more.
By investing in an investment bond they can still enjoy a low tax environment without loss of access. Then, when the time is right, the funds could simply be withdrawn from the bond and transferred to the superannuation environment.
Also, there are many investors who can no longer contribute to super because they do not meet the work test rules, or because they are aged 75 or more. Investment bonds enable them to enjoy a 30% flat tax rate, no Medicare levy, and no need to create other structures such as family companies.
Investment bonds are also much more attractive for estate planning than super. Money in super is distributed at the discretion of the trustee of the fund and is often open to challenge, resulting in years of litigation.
A Binding Death Nomination can alleviate this, but the downside is that it may remove the ability of the estate to distribute the funds in a tax-effective manner.
In contrast money in investment bonds passes tax-free to the nominated beneficiary and is not open to challenge.
As always, make sure you take advice to ensure the product you invest in is appropriate for your goals and risk profile.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: firstname.lastname@example.org